Decision-Making Techniques Summary

Week 8 - 14

Week 8 - ​Cost-Benefit Analysis

Cost-Benefit Analysis
● Keywords:
○ Analysis tool
○ Equivalent money value
○ Benefits and cost
○ Public project
○ Valuable or not
○ Physical or non-physical project
⇒ tools to make the decision of a public project, physical or non-physical, and evaluate the
value of the project in terms of financial aspects (funds or money)

● History:
○ Jules Dupuit (1848)
○ Alfred Marshall = formulating some of the formal concepts as the base of CBA
○ Implementation:
■ 1935 Federal Navigation Act
● "Mississippi River Flood"
● The opposition between the Congress and the engineers
⇒ Analyzing the benefit and cost of building a dam around the
Mississippi River
● Benefit = decrease the potential of floods in the area
⇒ Calculation of the money saved from the damage caused by the
flood)
● Cost = infrastructure goods
● The Corps of Engineers
● 1950 - Involving economical aspect
● United States of America implements the CBA in public project
to analyze the cost and benefit for them (bureaucrats or the
state) and the target (public, environment, and etc.)

● Approach of CBA (Brent, 2006)

○ All benefit and cost​:
■ Private and social
■ Private: goods used to construct something
■ E.g. Infrastructure
■ Social: externalities = impact after an activity or action
■ E.g. Cutting down trees [action] causes flood [externalities]
■ Direct and indirect
 ■ Direct: costs and benefits that impact directly towards the action or
activity
■ E.g. Construction of highways in Papua = direct cost is the
cement purchased and other goods
■ Indirect: costs and benefit that impacts incidentally towards its
surrounding
■ E.g. The impact of the construction of highways towards the
villages surrounding the area of construction
■ Tangible and intangible
■ Tangible: measurable or quantifiable impact
■ E.g. Monetary value
■ Intangible: no quantification of impact (invisible) but the effects are
seen towards the project
○ Benefit and cost based on ​welfare economics​ (not only private)
■ Externalities (impacts) from the actions being taken towards its surroundings
■ E.g. Coal mining produces profit but it impacts poorly to the
environment (externality)
○ The CBA's valuation should reflect the ​actual behavior​ of producers and consumers
■ The public project must reflect on how consumers and producers behave
○ Use ​social discount rate​ (include considerations)
■ Consider the long-term impacts of the public project
■ E.g. Plantations of palm oils affects the environment; must create a
sustainable development after its plantation
■ Discount rate = considering the value of money in the long-run (the amount it
depreciates over-time_

Description:
1. Ex-ante (forecast or predictions)
2. In Medias Res (starting from the middle; no introductory)
3. Ex post (actual results rather than forecasts)
● Data
○ Data on Ex post is feasible and clear
○ Data on Ex ante is difficult; requires estimation
● Lesson learned of the project (evaluation)
○ Contribution of Ex post is very high
○ Contribution in Ex ante is very small

● Steps in CBA
1. Identify costs and benefits
2. Costs and benefits: direct and indirect
■ Further analysis of the costs and benefits (e.g. Social, private, direct, and etc.)
 3. Set limits or assumptions: the scope
■ Limitation of the analysis; narrowing the area (not too broad)
4. Establish methods of quantifying costs and benefits
5. Calculate benefit and cost
6. Calculate the investment feasibility criteria

● The Advantages of CBA

○ Considerations in project decision-making; especially public projects
○ Learn the true value of a public project
○ Learn the potential benefits of similar projects
○ Be a tool of control for the public to assess the performance of bureaucrats

Week 9 - ​Feasibility Study

Feasibility Study:
❖ Definition
⇒ An analysis that takes all of the project's relevant factors into account to ascertain the
likelihood of completing the project successfully
❖ One of the tools is ​investment criteria
⇒ the indicators to determine whether to proceed or not with the project
- Net Present Value
⇒ a number indicating the amount of profit to be received in the future which is valued
at the present value of money
● Present value
⇒ calculate the value to be received in the future on the current value; for
benefit and cost

❏ The converter is the interest rate

 NPV =​ Total present value of benefit - (total present value of cost + investment)

Example project​ → District Cemara

District "Cemara" wants to build a sports stadium in order to improve the achievements of young people
in sports. There was an opposition from the Council members who declared that the money should be
used for another purpose, because the benefits of building the stadium were small. What should they
do?
Identification cost and benefits:
• Direct Benefits​:
– Employment rate will increase
– PAD (local revenue) will increase
 • Indirect Benefits:
– The economic activities of society will increase
– The value of the area will increase
– The achievement and character formation of the younger generation will increase

• Direct Costs
– Development
– Land lease/land purchase
– Wages and salaries
– Stationary care
– Electricity
– Water
– Telephone
– Routine maintenance

• Indirect Costs
– Loss of farmers' livelihood
– Kiosk’s construction costs
– Decline in environmental quality
– The inclusion of negative culture in society

Calculating value of cost benefit:

– Average benefit: Rp 80.000.000/year

– Average cost: Rp 30.000.000/year

– Investment: Rp 200.000.000
– The age of the project: 10 years
– Depreciation: Rp 20.000.000/year
– Discount rate: 12%
The Net Present Value ​is a number indicating the amount of profit to be received in the future which is
valued at the present value of money.
Project’s benefits and costs should be assessed at the same rate whether it will be assessed at present
(present value) or will be assessed for the future (future value)

- Σ (Bn – Cn)
- NPV = --------------------------
- ( 1 + i )ⁿ

- NPV ​ = 452.000.000 - (169.530.000+200.000.000)

= 82.550.000
Contoh Soal NPV 
Sebuah Perusahaan X ingin membeli sebuah mesin produksi untuk meningkatkan
jumlah produksi produknya. Diperkirakan untuk harga mesin tersebut adalah Rp. 150
juta dengan mengikuti aturan suku bunga pinjaman yakni sebesar 12% per tahun.
Untuk Arus Kas yang masuk pada perusahaan itu diestimasikan sekitar Rp. 50 juta per
tahun selama 5 tahun. Apakah rencana investasi pada pembelian mesin produksi diatas
dapat dilanjutkan?

Penyelesaiannya :

Diketahui :

Ct = Rp. 50 juta

C0 = Rp. 150 juta

r = 12% (0,12)

Jawaban :

NPV = (C1/1+r) + (C2/(1+r)2) + (C3/(1+r)3) + (C3/(1+r)4) + (Ct/(1+r)t) – C0

NPV = ((50/1+0,12) + (50/1+0,12)2 + (50/1+0,12)3 + (50/1+0,12)4 + (50/1+0,12)5) –

150

NPV = (44,64 + 39,86 + 35,59 + 31,78 + 28,37) – 150

NPV = 180,24 – 150

NPV = 30,24

Jadi nilai untuk NPV-nya adalah Rp. 30,24 juta.

- Benefit-Cost Ratio
⇒ A balance between future receipt which is assessed by current money value at
current costs.

→ ​B/C ​Ratio​ (​Benefit Cost Ratio​) adalah ukuran perbandingan antara

pendapatan dengan Total Biaya produksi (​Cost​ = C). ... Perhitungan b/c
ratio​ ini dihitung dari tingkat suku bunga. Dalam batasan besaran nilai
B/C digunakan sebagai alat untuk mengetahui apakah suatu usaha
menguntungkan atau tidak menguntungkan.
 BCR = Total present value of benefit / total present value of cost + investment

PV = Fn/ ( 1 + r ) n

Dimana :

Fn = Future value ( nilai pada akhir tahun ke n )

PV = ( Nilai sekarang ( nilai pada tahun ke 0 )

r = Suku bunga

n = Jumlah Waktu ( tahun )

Sedangkan pengambilan keputusan terhadap kelayakan dapat dilihat dari nilai BCR yang ditentukan
sebagai berikut :

● Jika BCR ≥ 1, maka dikatakan bahwa benefit dari proyek tersebut lebih besar daripada
pengorbanan yang dikeluarkan. Sehingga proyek tersebut dapat diterima atau layak
(feasible).
● Sebaliknya jika BCR <1 maka dikatakan bahwa benefit dari proyek tersebut lebih kecil
daripada pengorbanannya atau proyek tersebut tidak layak (not feasible).

Contoh Kasus :

Sebuah klinik sedang mempertimbangkan untuk membeli beberapa peralatan medis baru dengan
harga Rp.25.000.000. Dengan adanya peralatan medis tersebut diperkirakan klinik tersebut dapat
melakukan penghematan sebesar Rp.500.000 per tahun dengan jangka waktu selama 5 tahun.
Pada akhir tahun ke 5 peralatan tersebut memiliki nilai jual sebesar 40.000.000. Dengan tingkat
pengembalian investasi sebesar 9% per tahun apakah pembelian peralatan medis akan
menguntungkan bagi klinik tersebut ataukah tidak?

Perhitungan :
Melalui persamaan berikut maka akan dapat kita input nilai-nilainya menjadi :

BCR ​= (Present Value dari Manfaat / Present Value dari Pengorbanan atau biaya)

= (500.000 (P/A, 9%,5) + 40.000.000 (P/F,9%,5) / 25.000.000

=((500.000(3,88966) + 40.000.000(0,64993))/25.000.000

BCR =1,17

Karena nilai BCR yang dihasilkan nilainya lebih dari 1 maka investasi pembelian peralatan medis
baru tersebut dianggap layak dan menguntungkan bagi klinik di masa yang akan datang. Jika
demikian, maka disimpulkan bahwa klinik dapat membeli peralatan medis tersebut.

Contoh lainnya :

Sebuah perusahaan ingin merenovasi bangunan apartemen yang mereka miliki dengan profit
tahunan yang mereka harapkan sebesar $100.000 selama tiga tahun ke depan. Saat ini mereka
mengeluarkan dana $50.000 untuk menyewa peralatan. Jika tingkat inflasi adalah 2% maka apakah
gedung tersebut layak untuk direnovasi?

Penyelesaian :

Pertama kita perhitungkan dulu nilai Present Value sebagai berikut :

= ($100,000 / (1 + 0.02)^1) + ($100,000 / (1 + 0.02)^2) + ($100,00 / (1 + 0.02)^3)

= $288,388

Sedangkan ​BCR​ = $288,388/$50,000 = 5,77

Karena nilai BCR memiliki angka 5,77 yang nilainya lebih besar dari 1 maka kegiatan perusahaan
untuk renovasi apartemen dianggap dapat memberikan keuntungan di masa yang akan datang
sehingga proyek ini layak untuk dijalankan.

- Internal Rate of Return

⇒ the discount factor at the time of NPV is zero compared to the cost of capital to be paid

● IRR can also be regarded as the rate of return of a project's net investment

● IRR can be calculated using this formula: ​ NPV1

 ● IRR = i1 + (i2 – i1) X ------------------------
(NPV2 – NPV1)
If the IRR value is equal to or greater than the interest rate then a project is declared feasible.
Conversely, if the IRR value is smaller or less than the interest rate then the project is not feasible to do.

- Pay Back Period

○ Time of return to recover the invested capital investment.

Week 11 - ​Preferences

def.
→ used in relation to choosing between alternatives
→ refer to individual’s attitude towards a set of objects, typically reflected in an explicit decision
making process (PSYCHOLOGY)
→ refers to set of assumptions related to ordering some alternatives based on the degree of
happiness, satisfaction, gratification, enjoyment, or utility they provide, a process which result in
an optimal choice (economic and social sciences pov)

Tech

1. Voting
→ methods for group, kayak meeting sm electorate, usually pake discussions, debates and or
election campaigns

→ paling simple, diantara lainnya, biasanya digunain pas political process kayak election, trus
marketing juga.
- Example: pangsa pasar riset pemasaran menurut metode riset, result of political
parties participant on general election 2014

2. Bayes
→ calculating probability of every decision
- Steps to be done:
- Set criteria to use
- Sebagai basis penilaian
 - Kriteria sangat menentukan analisis terhadap project
- Tidak ada limitasi buat jumlah kriteria
- Find the value of each criterion
- Compiled closed answers questions
- Minta stakeholder buat ngisi questions
- Processing
- Contoh questionnaire:

- Set the probability of each criterion: ​expert judgement

- This technique of judgment dilakuin berdasarkan beberapa kriteria yang
udah ada dari experts di specific knowledge area, product area, dll
- Metode bisa FGD, pake delphi techniques (policy formulation deh kalo
gasalah), sama indepth interview
- Calculate the probability value of each alternative
 - Making decision

3. Exponential comparison → ​To support in the calculation process this application

uses ​Exponential Comparison Method (ECM). This ​method is one of the decision
making ​methods that quantifies the opinion of one person or more in a certain
range. In principle, it is a scoring ​method​ for the existing choices.

4. Bardach
● Consider smooth implementation of the program
● Criteria used: technical, economic, administrative and political
● Value assignment: use questionnaire or secondary data
● Assessment method: expert judgment or analysis

Bardach criteria:
Example:

5. Prince
 ● Stand out for four aspect measurement:
- Probe → who the most important person for alternatives
- Interact → find out the preferences for the actor
- Calculate → account the value of the preferences
- Execute → implement the alternative

Criteria​: stakeholder
- Support​ (issue position): the ability to provide encouragement, motivation, or
enthusiasm for alternative choices
- Interest​ (salience): desire to be achieved / how important the alternative for each actor
- Resources​ (power): potential power to block or release the alternative

Valuation​:
– Support : -1 or +1
– Interest: 0 - 1
– Resources: 0 – 1

Calculation:​ multiply all aspects of each stakeholder and sums up

Assessment source​: data or questionnaire

6. Perspective analysis
Week 13 - ​Analytical Hierarchy Process (AHP)

● Proses hirarki analitik adalah teknik terstruktur untuk mengatur dan menganalisis keputusan
yang kompleks, berdasarkan matematika dan psikologi.