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UNIVERSITI TEKNOLOGI MARA PUNCAK ALAM
FACULTY OF BUSINESS AND MANAGEMENT
BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE
ADVANCED CORPORATE FINANCE (FIN544)
INDIVIDUAL ASSIGNMENT:
CASE STUDY: DEVELOPMENT OF ISKANDAR MALAYSIA
PREPARED FOR:
DR. SHAHSUZAN BIN ZAKARIA
PREPARED BY:
NUR AIN SUFIAH BINTI HAZMAN (2023365441)
GROUP:
BA242 3A
SUBMISSION DATE:
WEEK 13 ACKNOWLEDGEMENT
First and foremost, I would like to praise and gratitude to the Almighty Allah S.W.T for giving the strength and because of His blessings, I finally managed to accomplish this individual assignment. Without His blessings, I wouldn’t have gone this far. This assignment completes with effort and cooperation from my lecturer and other members too. In preparing this case study for course FIN544 Advanced Corporate Finance, I wish to express my sincere appreciation to Dr Shahsuzan, who guided me through this assignment and provided valuable suggestions for me. I hope that all the knowledge that I’ve gain from this course be beneficial in life and the future. Without his lead and encouragement, this report would not have been complete in the given period.
Furthermore, I would like to express gratitude to my beloved parents for
their moral, physical, and emotional support throughout the implementation of this case study. I was able to finish the project and make it a good and fun experience. Thanks to my lecturer that has guide me to produce a good report with all his abilities and responsibilities. Hopefully, all the efforts I’ve made for this assignment will give the best results. Last but not least, an honourable mention to all my classmates because they also help in giving ideas and comments in order to complete my assignment. TABLE OF CONTENT
1.0 DISCUSS THE CAPITAL INVESTMENT PROCESS..................................1
2.0 DISCUSS THE SCENARIO AND SENSITIVITY ANALYSIS........................2
3.0 CALCULATE THE OCF BASE, BEST AND WORST CASE........................3
4.0 CALCULATE THE NPV FOR BASE, BEST AND WORST CASE................4
5.0 EVALUATE THE SENSITIVITY OF BASE CASE OPERATING CASH FLOW
(OCF) TO CHANGES 10 PERCENT IN VARIABLE COST..................................5
6.0 BASED ON THE ANSWER ON SENSITIVITY ANALYSIS, DISCUSS THE
IMPACT TOWARDS IRDA..............................................................................6
7.0 CALCULATE BASE CASE FINANCIAL BREAKEVEN LEVEL OF OUTPUT.
WHAT IS THE DEGREE OF OPERATING LEVERAGE (DOL).............................7
8.0 ADVICE THE IRDA FOR TELUK BAHANG PROJECTS EITHER GOOD INVESTMENT OR NOT BASED ON CALCULATION AND DISCUSSION.............9 1.0 DISCUSS THE CAPITAL INVESTMENT PROCESS
Capital investment refer to the process of investing money into long-
term assets to generate future benefits such as greater revenues, lower costs, or higher productivity. It can include purchasing new equipment, constructing a new facility, and they are crucial for companies looking to expand or improve their long-term productivity and efficiency. The capital investment process is an important aspect of strategic planning for businesses seeking to expand and enhance their operations. It involves evaluating, selecting, and deploying financial resources to acquire assets or undertake projects that can generate long-term returns and drive organisational growth.
Company must follow right steps in capital investment process to
choose the best investment option. Firstly, company must identify investment opportunities. For instance, companies must consider acquiring physical assets like machinery, equipment, real estate, or infrastructure to improve operational efficiency or expand business capabilities. Next, company must consider the assessing resource limitations. It is evaluating the company’s ability to invest in capital expenditures given the availability of funds and time. This involves establishing baseline criteria for evaluating alternatives. Besides, company must evaluate alternatives. To evaluate alternatives, businesses will compare outcomes using measurement methods. The results will be compared not just to other alternatives, but also to a predetermined rate of return on investment set for each project under consideration. Also, companies use capital budgeting analysis techniques like net present value (NPV), internal rate of return (IRR) and Payback Period to assess the economic viability of potential capital investments. They evaluate factors like expected returns, risks, and alignment with strategic objectives.
1 1.0 DISCUSS THE SCENARIO AND SENSITIVITY ANALYSIS
Scenario analysis and sensitivity analysis are two common approaches
in financial modeling for assessing the risks and probable outcomes of company decisions. Scenario analysis involves analysing possible future circumstances and predicting their outcomes based on various variables and assumptions. It investigates the effects of adjusting numerous variables simultaneously on a financial model. A crucial concern is determining whether a corporation will be able to service its debt if the economic climate in which it operates changes. Some of the variables that may be stressed at the same time in a scenario analysis are exchange rates, interest rates, inflation, resource availability for renewable energy deals, and project availability for financing. Common scenario analysis includes best case, base case and worst case. Scenario analysis allows companies to test strategic proposals and provides a rational and structured way to analyse the future and examine the potential impacts of both negative and positive.
On the other hand, sensitivity analysis is an investigation that is driven
by data. It determines how various independent variable values of a business can have an impact on the dependent variable under a given set of assumptions. It explores the results of changing a single variable at a time. This ultimately leads to changes in the output and profitability of the business. Sensitivity analysis is important in the realm of financial forecasting because sensitivity analysis helps finance teams better understand how changes in costs, revenues, or other financial inputs can affect profits, net worth, or other key financial metrics. Sensitivity analysis help in risk management that identify which variables have the most impact on your forecasts, helping to identify areas that need risk mitigation strategies. Also, can make a better decision making to understand the potential range of outcomes and make more informed decisions by sensitivity analysis.
2 3 3.0 CALCULATE THE OCF BASE, BEST AND WORST CASE
Initial outlay Years Tax Variable Interest Rate of
Costs Return RM1,500,00 10 35% RM3,000 17% 0
Salvage Depreciation Fixed cost Price Quantity
value 0 1,500,000/1 RM400,000 RM5,000/ 1000/unit 0 unit =RM150,000
Calculation the best case and worst case NPV for the project Base case Lower bound (- Upper bound 10%) (+10%) Unit sales 1000 900 1100 (Quantity) Price per unit RM5,000 RM4,500 RM5,500 Variable cost per RM3,000 RM2,700 RM3,300 unit Fixed cost RM400,000 RM360,000 RM440,000
Calculation of operating cash flows
Formula: OCF= [Q (P-VC)-FC] (1-TAX) + Depreciation (TAX) OCF Base Case = [1000 (5,000-3,000) - 400,000] (1-0.35) + 150,000 (0.35) = RM1,092,500 OCF Best Case = [1100 (5,500-2,700) - 360,000] (1-0.35) + 150,000 (0.35) = RM1,820,500 OCF Worst Case = [900 (4,500-3,300) - 440,000] (1-0.35) + 150,000 (0.35)
4 = RM468,500
5 4.0 CALCULATE THE NPV FOR BASE, BEST AND WORST CASE Using financial calculator:
NPV
CF0 RM1,500,000 +/- enter ↓
C01 RM1,092,500 enter ↓
Base case F01 10 enter
NPV IRR 17 enter ↓
CPT NPV = RM3,589,524.46
CF0 RM1,500,000 +/- enter ↓
C01 RM1,820,500 enter ↓
Best case F01 10 enter
NPV IRR 17 enter ↓
CPT NPV = RM6,980,987.90
CF0 RM1,500,000 +/- enter ↓
C01 RM468,500 enter ↓
Worst case F01 10 enter
NPV IRR 17 enter ↓
CPT NPV = RM682,555.80
6 5.0 EVALUATE THE SENSITIVITY OF BASE CASE OPERATING CASH FLOW (OCF) TO CHANGES 10 PERCENT IN VARIABLE COST
Decrease in variable costs by 10%
Old OCF Base Case = [1000 (5,000-3,000) - 400,000] (1-0.35) + 150,000
(0.35) = RM1,092,500 New OCF Base Case = [1000 (5,000-2,700) - 400,000] (1-0.35) + 150,000 (0.35) = RM1,287,500
Sensitivity formula: New OCF – Old OCF
New VC – Old VC
Sensitivity = RM1,287,500 - RM1,092,500
RM2,700 - RM3,000 = (RM650) Interpretation: If decrease by RM1 in variable costs, it will increase the OCF by RM650
Increase in variable costs by 10%
Old OCF Base Case = [1000 (5,000-3,000) - 400,000] (1-0.35) + 150,000
(0.35) = RM1,092,500 New OCF Base Case = [1000 (5,000-3,300) - 400,000] (1-0.35) + 150,000 (0.35) = RM897,500
Sensitivity = RM897,500 - RM1,092,500
RM3,300 - RM3,000
= (RM650)
7 Interpretation: If increase by RM1 in variable costs, it will reduce the OCF by RM650
8 6.0 BASED ON THE ANSWER ON SENSITIVITY ANALYSIS, DISCUSS THE IMPACT TOWARDS IRDA
Based on the sensitivity analysis, the impact towards IRDA is the
decrease in variable costs will increases operating cash flows. In this scenario, reducing variable costs by RM 300 per unit resulted in an increase in OCF from RM 1,092,500 to RM 1,287,500. Hence, the increase in OCF increases the NPV. It shows that operating cash flow (OCF) and Net Present Value (NPV) of Teluk Bahang project are affected by variable costs. Therefore, IRDA must overseeing and make sure these costs do not affect the financial feasibility of the project. Overall, IRDA having negative sensitivity. If IRDA increase by RM1 in variable cost, it will reduce the OCF by RM650 for IRDA which means unsustainable for the project and less profitability. If the variable cost decrease by RM1, it will increase the OCF by RM650 which means improvement in profitability due to lower operational costs and it has better financial performance and better return on investment. To conclude, IRDA can improve risk management to minimize risk, make more informed decisions, strategically plan for multiple situations, boost stakeholder confidence, and optimize project performance.
9 7.0 CALCULATE BASE CASE FINANCIAL BREAKEVEN LEVEL OF OUTPUT. WHAT IS THE DEGREE OF OPERATING LEVERAGE (DOL)
If sales increase by 1% hence the Operating Cash Flow will increase by 2.2423%. The DOL is inversely related to the variability in operating cash flow. The DOL's indicates that the operating cash flow will increase by 2.2423% for every 1% increase in sales. This calculation indicates the operating leverage is moderate.
11 8.0 ADVICE THE IRDA FOR TELUK BAHANG PROJECTS EITHER GOOD INVESTMENT OR NOT BASED ON CALCULATION AND DISCUSSION
From the computations and analysis made in the two sections above, the proposal to invest in the Teluk Bahang project seems favourable to IRDA. In this regard, the project shows that it is likely to be value creating through an analysis of NPV under the base and the best case and even the worst-case scenario. The OCF analysis of this project demonstrates the ability to maintain adequate amounts even in the wake of major alterations of variable costs. However, it should still stay cautious of the costs to avoid any risks linked with volatile variable costs as per the experience of IRDA. All things considered, IRDA can consider the Teluk Bahang project as a suitable and profitable investment provided that proper cost-reducing measures are adopted, and the situation is monitored consistently. In my opinion, the project of Teluk Bahang is a good investment for IRDA because the NPV is positive for all cases, proving that it is an investment that will result in profit. For sensitivity analysis, it is shown that the project is sensitive to changes in variable costs. Even with the fluctuation in variable costs, the net present value is still positive and shows the very high NPV of RM 6,980,987.90 is obtained in the best-case scenario.
