Investment Analysis in Utilizing Carbide Waste as a Material for Making Bricks

The production of acetylene gas uses the main material calcium carbide (CaC₂) and water (H₂O). The production results in acetylene gas and carbide residue waste. Carbide residue waste is classified as Hazardous and Toxic Material waste and must be sent to a third party with permission to process and utilize the waste. Routine deliveries to third parties are a cost that reduces PT X’s profit. PT X decided to develop a plan to utilize the carbide residue waste internally to reduce waste management costs. Research and studies were conducted to analyze and calculate the feasibility of this project. The primary challenge in implementing this project is assessing the market opportunity, which requires a comprehensive analysis included in the investment analysis section using methodologies such as the business model canvas, Porter’s five forces, capital budgeting analysis, sensitivity analysis, scenario analysis, and Monte Carlo simulation to determine economic feasibility. The research identified an investment project with a Net Present Value (NPV) of IDR 4,665,679,514 and an Internal Rate of Return (IRR) of 23.06% with Payback Period 9.16 years. Sensitivity analysis revealed that the price per unit realization is the most sensitive factor, causing the NPV to turn negative with a swing change of−20%. Scenario analysis showed an NPV of IDR 8,773,737,112 in the worst scenario and IDR 35,822,888,544 in the best scenario, while Monte Carlo simulation indicated a probability of NPV < 0 of 33.43% and NPV > 0 of 66.57%. The investment project analysis results demonstrate the feasibility of implementing this project for the company, with positive economic indicators and reduced waste management costs.

Introduction

The industrial gas business in Indonesia has proliferated throughout 2024 due to the increasing market demand for industrial gas. Palm oil companies, the fertilizer industry, health industry, and textiles, which are the primary consumers of industrial gas, were crucial elements in the growth of the industrial gas business in 2024 (Waluyo, 2024).

PT X is engaged in industrial gas manufacturing and produces gas for industrial needs, such as Acetylene, Oxygen, and Nitrogen. With the high market demand for industrial gas, PT X still has issue related to waste management resulting from the acetylene gas production process. The waste produced is carbide residue waste. With the increase in sales of gas acetylene, carbide residue waste has also increased significantly. This carbide residue waste must be sent to a third party in Java who has permission to utilize the waste, resulting in additional costs for the company over the past few years. Therefore, due to high shipping costs and in accordance with the principles of environmental management and realizing sustainable development, PT X plans to utilize the carbide waste as a material to make brick products which are useful for the community.

Studies have also been conducted with one of the universities in Indonesia, namely Gadjah Mada University. The results of this study show that bricks made from a mixture of carbide waste materials are safe to use for buildings, both in terms of safety and technical aspects as SNI 03-03-0349-1989 Concrete Bricks for Wall Masonry.

This study will present an investment project analysis for utilizing carbide waste as a material for making bricks and evaluates whether it is profitable compared to the cost of shipping carbide waste to third party in Java.

Literature Review

Investment is a commitment of money spent over a period of time to obtain future payments that will compensate the company or investor for the time the funds are committed, the expected rate of inflation during this time period and uncertainty of the future payments. The investor expects to earn a return (required rate of return) therefore, investment project analysis is required to measure the rate of return and risk involved (Reillyet al., 2018).

A feasibility study is carried out to determine if the project is feasible or not. The goal of feasibility studies and project evaluation is to assess whether a project is feasible. Management will take the study’s findings into account when deciding whether to accept or reject the project proposal. The conceptual framework for this study can be seen in Fig. 1.

Fig. 1. Conceptual framework.

The initial analysis is to assess the market opportunity and threat by creating Business Model Canvas and Porter’s 5 Forces. Business model canvas is a tool that is commonly used to plan strategies and business models in easy-to-understand visualizations (CFI Team, 2023). The Porter’s 5 forces analysis is used to identify and analyze five competitive forces where from these results the company can determine the strengths and weaknesses in this industry so that it can see the gaps and develop the right strategy. (Gratton, 2024). The author will then analyse financial feasibility using Net Present Value (NPV) and Internal Rate of Return (IRR), which are expressed as follows:

• Net Present Value:

(1) $$\begin{array}{r}NPV={\sum }_{t=1}^T\frac{Ct}{(1+r{)}^t}-C_0\end{array}$$

• Internal Rate of Return:

(2) $$\begin{array}{r}0=NPV={\sum }_{t=1}^T\frac{Ct}{(1+IRR{)}^t}-C_0\end{array}$$

Sensitivity analysis is used to eliminate uncertainty about the future by modeling financial risks and decisions. In this study, the author performed a sensitivity analysis on several variables such as unit price, total quantity sold, direct material cost, direct labor cost, direct electrical cost, long-term debt interest rate, and inflation rate. By performing this sensitivity analysis, we can see how changes in one variable can affect the profitability of a project and ultimately affect the net present value for the worse or better result.

Scenario analysis can be used to address project risk in order to capture the variability of cash inflows and NPV. Scenario analysis is a behavioral approach that uses several possible alternative outcomes (scenarios) to gain insight into the variability of returns, measured here by NPV. One of the most common scenario approaches is to estimate the NPVs associated with the pessimistic (worst), most likely (expected), and optimistic (best) cash inflow estimates. The range can be determined by subtracting the NPV of the pessimistic outcome from the NPV of the optimistic outcome (Gitman & Zutter, 2015).

Author also performed a Monte Carlo Simulation which randomly generates values for uncertain variables over and over to simulate a model. The existing scenario analysis will be used along with the correlation coefficient, from here the probability distribution of the project return will be obtained (Gitman & Zutter, 2015).

Risk and uncertainty are present in every capital budgeting process. The main question that arises in management decision making, however, is the one relating to the impact risk and uncertainty will have on the investment. Comparing the most commonly used methods, it can be concluded that the Monte Carlo simulation has become not only a recommended, but also a necessary, or even yet, an obligatory tool, given that it is one of the most complete and comprehensive methods for the assessment of the impact risk and uncertainty have on capital investments. (Karanovic & Gjosevska, 2012).

Methodology

This research used quantitative and qualitative method. The research also used primary and secondary data. Primary data is obtained directly from company and through interview to workers in several brick factories. Secondary data is from the company’s financial reports published on the website  www.idx.co.id as a company listed on the stock exchange, other information collected from books, journals, articles, regulation and laws, and publications.

Results and Discussion

Business Model Canvas

Customer Segment

Bricks are one of the basic materials for buildings. The target segments for this product include contractors, property developers, the community, small to medium-scale construction companies, building material stores, and government or non-profit organizations. The main focus for selling these bricks in large quantities is on contractors and property developers, especially considering that the area around Balikpapan is a supporting area for the new capital city of Indonesia. Therefore, development will be intensified. However, it should be noted that these bricks are made from carbide waste, so efforts should be made to address any negative issues related to the material in order to achieve net zero emissions.

Value Proposition

These bricks attractive to certain parties such as the government and contractors is the fact that buying and using brick products made from carbide waste means they are also supporting zero waste and net zero emissions, which are actively promoted worldwide. This value proposition needs to be highlighted by the company to attract customers, especially those with vested interests in sustainability.

Channels

As a company listed on the stock exchange, making an announcement on the company’s website or social media can be the first step to inform the public that this product is also sold by the company. Another effective step is to collaborate with building material stores around Balikpapan to establish a good network with the store’s customers. Engaging in direct sales by building strong relationships with contractors or direct customers is also an option to sell the bricks. The company as an industrial gases manufacturer certainly has a customer database that includes clients in the construction industry that can be used as a valuable sales channel.

Customer Relationships

In order for the relationship with customers to be successful and long-lasting, it is important to provide good service such as fast queues and responsive customer service. Detailed explanations regarding product specifications, including both advantages and disadvantages, should be provided upfront to prevent customer complaints. The quality of the products offered must also consistently meet the promised conditions to ensure customer loyalty.

Revenue Stream

Sales of bricks can be in retail or wholesale, and customized products can also be an option, with prices offered certainly higher than regular products. Another source of revenue for the company can come from providing delivery services to customers.

Key Resources

Key resources in brick making include physical assets, raw materials, and human resources. Physical assets consist of production buildings, machines, equipment, and delivery vehicles. Raw materials include sand, cement, water, and carbide waste. Human resources encompass production operators, sales and marketing teams, as well as drivers and helpers.

Key Activities

Key activities in the brick business model consist of a series of production, marketing, distribution, and stock and raw material management:

• Production: Mixing of raw materials, molding of bricks, drying and storage, quality control.

• Marketing: Product promotion, relationship with customers, build loyalty, customer service.

• Distribution: Logistics management, packaging and shipping.

• Stock and Raw Material Management: Inventory management and collaboration with suppliers.

Key Partnership

Key partnerships in brick sales include partnerships that help support operations, thereby increasing efficiency and expanding market reach. Here are the key partnerships of brick sales:

• Supplier of raw materials.

• Distributor and building material stores.

• Contractors and developers.

Cost Structure

Cost structure or cost structure in brick sales includes all expenses required to produce, distribute, and sell the product. Here are the main components in the cost structure of the brick sales business:

• Production cost: Raw material, machine and equipment, labor, and electrical cost.

• Operational cost: Distribution and logistics, inventory, and loading and unloading.

• Marketing cost: Promotion, participation in tender or event.

• Administration cost: Employee, office operating cost.

Porter’s Five Forces Analysis

The Porter’s 5 Forces Analysis which consists of five competitive forces, namely competitive rivals, threat of new entrants in an industry, supplier power, customer power, and threat of substitutes ared used to identify and analyze these forces. It can be seen in Table I and Fig. 2.

Table I. Porter’s Five Forces of Brick Product

Threats	Attractiveness	Description
Rivalry among existing competitors	High	Rivals in the brick sales industry are quite numerous because bricks are a basic material for building construction. Price competition will certainly be one of the challenges that company will face in the market.
Threat of new entrants	High	The threat of new entrants in this industry is quite high due to the relatively low barriers to entry. The investment capital required for production equipment, technology, and raw materials for making bricks is easy and cheap to obtain.
Bargaining power of supplier	Low	Supplier, such as cement and sand suppliers, tends to have low bargaining power because of the many choices of suppliers available in the market. Building good relationships with suppliers can be a strategy to ensure stock availability.
Bargaining power of buyers	High	Buyers’ bargaining power is in the high category because buyers have the flexibility to buy from many manufacturers, increasing the choices for buyers, and are very price-sensitive. Bricks made from carbide waste are a product differentiation because they are environmentally friendly.
Threat of subtitutes	Medium	The threat of substitutes is considered a medium threat because there are substitute products commonly used for buildings, such as red bricks and lightweight bricks (hebel), but higher cost.

Fig. 2. Product’s Porter’s five forces.

Project Economic Analysis

This economic analysis will use capital budgeting analysis which is the process of evaluating and selecting long-term investments that are in line with the firm’s goal of continually increasing the company’s profit (Gitman & Zutter, 2015). The following are some assumptions used in calculating this investment analysis as follows:

• The inflation rate in this case using average inflation rate from 2019 to 2024 which is 2.69% (source:  www.bi.go.id).

• Corporate tax rate is 22% of net profit before tax.

• For sales, 60% will be on credit, and purchasing will account for 80% of COGS. Accrual will be projected as a percentage history of GA expenses. Account Receivable, Inventory, and Account Payable will be projected using average historical Average Collection Period, Average Age of Inventory, and Average Payment Period (assuming 365 days in a year).

• Cost of goods sold increase with inflation rate.

• The estimated projected sales quantity estimation is a 10% increase which is equivalent to the increase in acetylene gas sales.

• The company plans to finance 60% of the total investment (building, machinery, trucks, intangible assets, and net working capital) with long-term debt for a period of seven years (interest rate of 10.00% per year). The remaining 40% of total investment will be financed by common stock with assumption that all residual earnings will be retained.

Risk Analysis

In this project there is uncertainty and potential risks that need to be identified, assessed and measured. Three analysis methods will be used which are sensitivity analysis, scenario analysis, and Monte Carlo simulation.

Sensitivity Analysis

Sensitivity Analysis is carried out to determine which variables most influence the economics of this project. This analysis is also called what-if analysis, it is done by evaluating how input variables can change the output result. In this study, a 20% decrease and increase in variable is used to assess its impact on Net Present Value.

In the tornado chart and spider chart in Figs. 3 and 4, price per unit realization, direct material per product, and quantity sold realization are the variables that have the most influence on NPV. A +20% change in price per unit realization for a product increases the NPV by 163.33% to IDR 12,285,907,480, while a −20% change results in a negative NPV of 163.33% or minus IDR 2,954,548,452 from the initial NPV of IDR 4,665,679,514.

Fig. 3. Sensitivity analysis tornado chart.

Fig. 4. Sensitivity analysis spider chart.

Scenario Analysis

In this scenario analysis, author takes the four variables that have the most influence on the NPV obtained from the previous sensitivity analysis. These variables are the price per unit realization for product, direct material per product, quantity sold realization, and long-term debt interest rate. Three scenarios are used, worst case, base case and best case. In the scenario analysis calculation, a negative NPV was obtained in the worst-case scenario with a range of IDR 44,596,625,656 from the best case. The detail of calculation is shown in Table II.

Table II. Scenario Analysis

Variable	Unit	Worst case	Base case	Best case
Price per unit	%	67	100	139
Direct material	IDR	1,873	1,500	1,128
Quantity sold	%	57.08	100	159.23
Long-term debt	%	12.98	10	5.76
NPV	(8,773,737,112)		7,436,881,516	35,822,888,544
RANGE	44,596,625,656

Monte Carlo Simulation

Monte Carlo Simulation uses random number sampling to generate a range of possible outcomes and predefined probability distributions of possible NPV outcomes. A model typically generates a random NPV value a thousand times using a random integer each time. The result of this simulation is a probability distribution of possible outcomes based on random input numbers, which will provide a range of possible scenarios and likelihoods. The result of simulation is shown in Fig. 5 and Table III.

Fig. 5. Monte Carlo simulation result graph.

Table III. Monte Carlo Simulation Result

Descriptive statistics
Min	(38,810,467,589)
Max	43,445,064,908
Standard deviation	9,834,690,922
Median	3,048,956,447
Probability NPV < 0	33.43%
Probability NPV > 0	66.57%

Conclusion

The financial analysis indicates positive results for the project. The Net Present Value (NPV) is IDR 4,665,679,514, the Internal Rate of Return (IRR) is 23.06%, which is higher than the Weighted Average Cost of Capital (WACC) of 8.05%. The Profitability Index is 4.40, and the Discounted Payback Period is 9.14 years. Based on these figures, it can be concluded that the project is financially viable.

The most influential variables in this project are the price per unit realization, direct material cost for the product, and quantity of units sold. However, a 20% decrease in the price per unit realization alone renders the project unfeasible, resulting in a negative NPV of IDR 2,954,548,452. In the worst-case scenario, with a 20% decrease in each variable including price per unit realization, direct material cost per product, quantity sold realization, and long-term debt interest rate, the project becomes unfeasible with a significant negative NPV of IDR 8,773,737,112.

The initial investment cost is only IDR 1,650,000,000 in early 2024, with an additional investment of IDR 550,000,000 in the 5th year (2028) for purchasing machines to increase production capacity. This investment cost is lower than the projected shipping cost of carbide residue waste to Java, which is estimated to reach IDR 4,356,000,000 in 2025. In Monte Carlo simulation, the probability of NPV < 0 = 33.43% and NPV > 0 = 66.57%. This further shows that this project has a higher probability of success than failure. By not incurring high waste management costs, it will cut cost and increase the company profits dan further ensures that this project is highly feasible.

Based on the investment analysis above, it is evident that this project is highly feasible due to its low investment costs and positive financial parameters. Moreover, the elimination of high carbide waste handling costs further enhances the viability of this project. Therefore, the company should proceed with the implementation of this project promptly.