UITM SEGAMAT, JOHOR

BACHELOR OF BUSINESS ADMINISTRATION (HONS.) FINANCE

FACULTY OF MANAGEMENT AND BUSINESS

FIN544 : ADVANCED CORPORATE FINANCE

CASE STUDY : ISKANDAR MALAYSIA FOCUSES ON THE CAPITAL INVESTMENT
DECISION PROJECT AT TELUK BAHANG JOHOR

PREPARED BY:

NAME STUDENT ID

SYAURAH AFIQAH BINTI SALLEH 2022461512

NUR SYAHIRAH BINTI MOHD FARID 2022478722

NUR NABIHA BINTI ZAINUDDIN 2022622506

NURALEEYA NATASHA BINTI HANIZAM 2022455132

PREPARED FOR:

SIR SYAMSYUL BIN SAMSUDIN

CLASS:

JBA2423B

SUBMISSION DATE:

11 JANUARY 2024
TABLE OF CONTENT

CONTENTS PAGE

1.0 INTRODUCTION 1

2.0 CASE STUDY ANSWER

2.1 QUESTION 1 - CAPITAL INVESTMENT PROCESS 2

2.2 QUESTION 2 - SCENARIO AND SENSITIVITY ANALYSIS 4

2.3 QUESTION 3 - OCF BASE, BEST AND WORST CASE 5

2.4 QUESTION 4 - NPV FOR BASE, BEST AND WORST CASE 6

2.5 QUESTION 5 - SENSITIVITY OF BASE CASE OPERATING

CASH FLOW (OCF) TO CHANGES 10 PERCENT IN 7
VARIABLES COST

2.6 QUESTION 6 - IMPACT TOWARDS IRDA 8

2.7 QUESTION 7 - BASE CASE FINANCIAL BREAKEVEN

LEVEL OF OUTPUT AND THE DEGREE OF OPERATING 9
LEVERAGE (DOL)

2.8 QUESTION 8 - ADVICE TO IRDA FOR TELUK BAHANG 11

PROJECTS

3.0 REFERENCES 12

4.0 APPENDIX 13
1.0 INTRODUCTION

This case study is to identify the outcome of Iskandar Malaysia’s capital investment
decision in Teluk Bahang, Johor. Iskandar Malaysia was established in 2006 in Southern
Peninsular Malaysia aimed to drive the development of catalyst projects. Iskandar Malaysia is
envisioned as the most developed region in the Southern Peninsular Malaysia, seamlessly
integrating living, entertainment, environment and business in dynamic and lively cities.
Positioned at the southern tip of Peninsular Malaysia within the Johor state, Iskandar Malaysia
strategically lies on the world’s busiest shipping routes. Its natural resources and skilled
workforce have historically contributed to Johor’s excellence and are seen as key factors for its
future potential.

The Iskandar Malaysia land size is 2,217 sq.km , around three times the size of Singapore
and 48 times the size of Putrajaya. Next, Iskandar Malaysia is estimated to have 1.3 million
people or 43% of Johor's population of 3.17 million. The total Iskandar Malaysia GDP is about
USD 20 billion in 2005, 60% of Johor’s total GDP of USD 33.4 billion. The current per capita
GDP of USD 10,757 but half of Singapore’s about USD 30,000. The two main pillars of Iskandar
Malaysia’s economy, but services dominate by contributing about USD 10 billion in Iskandar
Malaysia.

The Iskandar Regional Development Authority (IRDA) is authorized to facilitate and

oversee the promotion, planning, processing and infrastructure development within the Iskandar
Malaysia region. IRDA plans to invest in a new project at Teluk Bahang and analyze the Teluk
Bahang project with initial investment strategy RM 1.5 million, has ten year life and no salvage
value. The project cost will be depreciated on a straight-line basis to zero over the life of the
project. Teluk Bahang project will project amount of sales 1,000 per unit per year, which are sold
RM5,000 per unit. The variable cost is RM 3,000 per unit and fixed cost are RM 400,000
annually. The company corporate tax rate is 35 percent and 10 percent changes for all variables
for the Teluk Bahang project from IRDA projection. Each investment of IRDA, the organization
set as 17 percent required rate of return.

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2.0 CASE STUDY ANSWER

2.1 CAPITAL INVESTMENT PROCESS

Capital investment involves the strategic allocation of funds in a business to generate

future profits, forming a long-term commitment that aims to generate returns over time. Usually
associated with the acquisition of a company's permanent fixed assets. This form of investment
is manifested in a variety of ways, including asset purchases, technology upgrades, and
production expansion or infrastructure development. The capital required for such ventures can
be drawn from a variety of sources, from conventional bank loans to venture capital deals. This
dynamic process reflects a deliberate and forward-looking approach by businesses to
sustainable growth and profitability. Capital investment is essential for the growth and success
of any business. It enables firms to boost productivity, improve efficiency, and remain market
competitive. It can assist companies in expanding their operations, introducing new products
and services, and entering new markets. It also creates job opportunities and contributes to a
country's overall economic prosperity.

Moreover, capital investment can be categorized into two main types which are financial
capital investment and physical capital investment. Firstly, financial capital involves investing in
instruments like stocks and bonds, offering potential for appreciation or income. It includes
Equity Investments where individuals are buying company shares for partial ownership, and
Debt Investments, purchasing bonds or lending with a fixed interest rate. Investors aim for
returns through dividends, interest, or capital gains, reducing risk through diversified portfolios.
On the other hand, physical capital investment allocates resources to tangible assets like land,
buildings, or equipment. It's crucial for production or service delivery. Land and Building
Investment involves purchasing or constructing structures, while Investment in Equipment and
Machinery includes acquiring tools for operations. Though it requires a significant upfront
commitment, physical capital investment can yield substantial long-term returns, contributing to
sustained business growth and success.

2
 Before engaging in capital investment, businesses should carefully consider various
important factors to ensure that the investment is aligned with their overarching strategic goals,
contributing to continued success. The most crucial aspect among these considerations is
financial feasibility, where metrics such as Net Present Value (NPV) and Internal Rate of Return
(IRR) play an essential role in assessing potential returns and risks. Equally important is
ensuring strategic alignment, where investments align with the organization's mission, vision,
and long-term growth plans. A comprehensive analysis of market conditions is essential to
gauge demand for relevant products or services, taking into account current trends and
dynamics. A thorough risk assessment is also crucial, covering market, operational, regulatory,
and other potential risks. Strategies to reduce risk include diversifying investment portfolios,
conducting extensive research and analysis, and implementing contingency plans to deal with
unexpected challenges. Furthermore, the critical steps of evaluating project management
capabilities, conducting cost-benefit analysis, and considering the overall impact on the
company's reputation are essential in making informed capital investment decisions. Businesses
can make educated decisions regarding capital investments that match with their strategic
objectives and have the ability to contribute positively to their long-term performance by
carefully examining these aspects.

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 2.2 SCENARIO AND SENSITIVITY ANALYSIS

The process of determining a portfolio's expected value after a particular period of time,
on the assumption that specific changes in the assets' prices or significant factors such as
interest rate shift—occur. In details, it is the process of estimating a portfolio's future value after
an established period of time, assuming certain changes or uncertainty in the business's values,
such as variable cost, fixed cost, price, and quantity, particularly when there are potential both
favorable and adverse events that could have an impact on the company. Business managers
typically utilize scenario analysis to assist in decision-making since it can be used to estimate
earnings or prospective losses and determine the best- and worst-case scenarios.

The analysis has three basic scenarios which are base case scenario, best case
scenario and worst-case scenario. An average scenario that depends on management
assumptions is identified as the base case scenario. Best case scenario, on the other hand, is
an ideal estimation scenario that businesses frequently use to accomplish their objectives. The
best-case scenario occurs when higher revenue and lower cost. Lastly, the worst case scenario
is regarded as the most awful and unpleasant one. This happened when revenue was lower and
costs were higher.

Sensitivity analysis is used to determine the impact of changing independent variable

values on a certain dependent variable. The analysis is a financial model that evaluates the
impact of changes in a single variable, such as price, quantity, fixed costs or variable costs, on
net present value. It also provides a method for predicting the outcome of a choice made on a
particular variable. Furthermore, in a sensitivity analysis, just one variable was changed while
the other variables were constant. For example, a business that is dealing with a 10% change in
fixed costs. It is necessary to do sensitivity analysis when one variable is changing. As a result,
determining which variable will have a bigger influence on the estimated net present value that
will help the financial management.Therefore, the more volatile the net present value, the higher
the forecasting risk associated with a particular variable, and the greater the attention required
for its evaluation.

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 2.3 OCF BASE, BEST AND WORST CASE

IO RM 1,500,000

N 10

P RM5000 / unit

VC RM3,000

FC RM400,000

Q 1000 unit

Tax 35%

Dep SLM
= IO/n
= RM1,500,000/10
= RM 150,000

Case P Q VC FC

Worst RM 4500 900 RM 3300 RM 440,000

Base RM 5000 1000 RM 3000 RM 400,000

Best RM 5500 1100 RM 2700 RM 360,000

FORMULA OCF = [Q(P-VC) - FC](1-Tax) + Depreciation (Tax)

OCF Worst Case = [900(4500-3300) - 440,000](1-0.35) + 150,000(0.35)
= RM 468,500

OCF Base Case = [1000(5000-3000) - 400,000](1-0.35) + 150,000(0.35)

= RM 1,092,500

OCF Best Case = [1100(5500-2700) - 360,000(1-0.35) + 150,000(0.35)

= RM 1,820, 500

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 2.4 NPV FOR BASE, BEST AND WORST CASE

i= 17% n= 10 IO= RM 1,500,000 PVIF= 0.2080 PVIFA= 4.6586

NPV FORMULA
NPV = OCF (PVIFA i, n) + SVAT (PVIF i, n) - Initial Cost

NPV WORST CASE = RM 468,500 (4.6586) + 0 (0.2080) - RM 1,500,000

= RM 682, 554.10

NPV BASE CASE = RM 1,092,500 (4.6586) + 0 (0.2080) - RM 1,500,000

= RM 3, 589, 520.50

NPV BEST CASE = RM 1,820, 500 (4.6586) + 0 (0.2080) - RM 1,500,000

= RM 6, 980, 981.30

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 2.5 SENSITIVITY OF BASE CASE OPERATING CASH FLOW (OCF) TO CHANGES 10
PERCENT IN VARIABLES COST

FORMULA :

OCF = [ Q (P - VC) – FC ]( 1 – Tax ) + Depreciation ( Tax )

Price Quantity Variable Cost Fixed Cost

(+ 10%)

Base RM 5,000 1,000 RM 3,000 RM 400,000

Sensitivity RM 5,000 1,000 RM 3,300 RM 400,000

Depreciation = RM 1,500,000
10

= RM 150,000

OCF Base = [1,000 (RM 5,000 – RM 3,000) – RM 400,000] (1 – 0.35) + RM 150,000

(0.35)

= RM 1,092,500

If variable cost increase 10% ,

OCF sensitivity = [1,000 (RM 5,000 – RM 3,300) – RM 400,000] (1 – 0.35) +

RM 150,000 (0.35)

= RM 897,500

7
Calculate the sensitivity ,

FORMULA :
SENSITIVITY = OCF 1 – OCF 0
Changes in Variable 1 – Changes in Variable 0

Sensitivity = RM 897,500 - RM 1,092,500

RM 3,300 - RM 3,000

= ( RM 650 )

2.6 IMPACT TOWARDS IRDA

Based on the sensitivity analysis on base case, IRDA having a negative sensitivity. If increase
RM 1 in variable cost, OCF will decrease by RM 650. On the other hand, if decrease RM 1 in
variable cost, OCF will increase by RM 650.

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 2.7 BASE CASE FINANCIAL BREAKEVEN LEVEL OF OUTPUT AND THE DEGREE OF
OPERATING LEVERAGE (DOL)
Base case financial breakeven level of output

Step 1

Year 0 1-9 10

OCF - - -

Initial Outlay (RM1 500 000) - -

Salvage Value After - - 0

Tax

Change In NWC (RM30 000) -

NWC Recovery - - RM30 000

Total Project Cash (RM1 530 000) - RM30 000

Flow

Step 2
FORMULA:-
NPV = OCF (PVIFA i,n) + Total Project Cash Flow Ending Year (PVIF i,n) – Initial Cost

0 = OCF (PVIFA 17%,10) + RM30 000 (PVIF 17%,10) – RM1 530 000
0 = OCF (4.6586) + RM30 000 (0.2080) – RM1 530 000
OCF (4.6586) = RM 1 523 760
OCF = RM327 085.39

Step 3
FORMULA:-
OCF = [Q (P – VC) – FC] (1 – Tax) + Depreciation (Tax)
RM327 085.39 = [Q (RM5 000 – RM3 000) – RM400 000] (1 – 35%) + RM150 000 (35%)
RM327 085.39 = [2 000Q – RM400 000] (0.65) + RM52 500
RM327 085.39 = 1 300Q – RM260 000 + RM52 500
1 300Q = RM534 585.39
Q = 411.22 Units

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Degree of operating leverage (DOL).
FORMULA: DOL = 1 + FC/OCF
DOL = 1 + (RM400 000 / RM327 085.39 = 2.2229% ֒If
IRDA sales increase by 1%, hence the Operating Cash Flow will increase by 2.2229%.

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 2.8 ADVICE TO IRDA FOR TELUK BAHANG PROJECTS

Based on the calculations above, the Teluk Bahang Project looks to be profitable,
particularly in the base and best-case scenarios. Positive Net Present Values (NPVs) in these
scenarios imply that the predicted cash flows of the project are adequate to cover the initial
investment and create positive returns. The Base Case Financial Breakeven (Q) output level is
also a good sign, indicating that the project can pay its expenses at a given level of output.
However, it is critical to examine the project's uncertainties and dangers. The sensitivity analysis
indicates a (RM 650) potential risk, stressing the importance of risk management. IRDA should
properly analyze and comprehend the elements that contribute to this sensitivity before
implementing efforts to prevent possible harmful consequences.

Furthermore, at 2.2229%, the Degree of Operating Leverage (DOL) suggests a

considerable level of sensitivity to variations in production levels. IRDA should be aware of the
project's ability to respond to changes in production and sales. In conclusion, while the Teluk
Bahang Project appears promising based on the financial statistics supplied, IRDA should
proceed with caution due to the inherent risks and uncertainties. A well-informed selection
supported by a solid risk management approach is critical for maximizing the investment's
potential rewards.

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3.0 REFERENCES

Adam Hayes, (5 April 2022), Degree of Operating Leverage (DOL). Retrieved from
https://www.investopedia.com/terms/d/degreeofoperatingleverage.asp

Aishwarya Srivastava, (3 May 2023), Capital Investment: Meaning, Types, How it Works
& Examples. Retrieved from
https://happay.com/blog/capital-investment/#:~:text=Capital%20investment%20is%20th
e%20process,facility%2C%20or%20acquiring%20another%20company.

CFI Team, (nd), Scenario Analysis vs Sensitivity Analysis. Retrieved from

https://corporatefinanceinstitute.com/resources/financial-modeling/scenario-analysis-vs-
sensitivity-analysis/#:~:text=Understanding%20Scenario%20Analysis%20vs%20Sensiti
vity%20Analysis&text=The%20difference%20between%20the%20two,variables%20at%
20the%20same%20time.

Will Kenton, (19 December 2023), Sensitivity Analysis Definition. Retrieved from
https://www.investopedia.com/terms/s/sensitivityanalysis.asp#:~:text=Sensitivity%20ana
lysis%20is%20a%20financial,a%20certain%20range%20of%20variables.

Will Kenton, (11 August 2023), Capital Investment: Types, Example, and How It Works.
Retrieved from https://www.investopedia.com/terms/c/capital-investment.asp

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4.0 APPENDIX

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