Capital budgeting examples

BCF7044: Corporate Finance Group Project
1
DIGI.COM

2
1.0 Historical Data Analysis
In this session, we will analyze DiGi‟s financial historical data from 2004 to 2008. All
financial data are extracted from DiGi‟s financial year report in those respective years
(DIGI: Appendix 6.0-8.0).
FORMULA
Liquidity Measures 2004 2005 2006 2007 2008
Short Term Solvency
Current Ratio Current Assets /Current liabilities 0.73 1.08 0.69 0.54 0.34
Quick Ratio Current Assests -Inventory /Current liabilities 0.72 1.07 0.68 0.54 0.34
Cash Ratio Cash /Current liabilities 0.56 0.91 0.53 0.33 0.15
Short term solvency provides information about a firm‟s liquidity. According to
DiGi‟s current ratio from 2004 – 2008, we notice that DiGi only achieved positive net
working capital in year 2005. Most of the time, DiGi operated under negative net
working capital. It shows that DiGi did not have sufficient cash convertible assets to
cover its liabilities in short term. This could be a real concern to DiGi‟s supplier as the
company did not have sufficient liquidity to pay off the short term debt. We also
noticed that quick ratio was similar to current ratio. This is because DiGi always has
low inventory level. In spite of negative net working capital and low inventory level,
we see this as the nature of telecommunication business rather than unhealthy
company performance. Likewise, DiGi‟s biggest competitor Maxis also experience
negative net working capital in its 2009 Q3 performance (Appendix 1.0). DiGi‟s cash
ratio was rather low compared to its current liabilities obligation. Last year, DiGi‟s
cash in hand was only sufficient to cover 0.15 times of its current liabilities.
Financial Leverage 2004 2005 2006 2007 2008
Long Term Solvency
Total Debt Ratio
Total Assests - Total Equity /Total
Assets 0.50 0.47 0.40 0.59 0.59
Debt-equity ratio Total Debt/Total Equity 1.00 0.89 0.67 1.44 1.44
Equity multiplier Total assests /Total Equity 2.01 1.88 1.68 2.46 2.45
Long term solvency ratios are intended to address the company‟s long-run ability to
meet its obligations or, more generally, its financial leverage. In 2004, DiGi‟s total
debt ratio was still 0.50. It means DiGi has RM 0.50 in debt for every RM 1 in assets.
Therefore, there was RM 0.50 in equity for every RM 0.50 in debt. However, the total
debt ratio increased to 0.59 in 2008; hence debt-equity ratio became 1.44 from 1.00.
This shows that capital structure of DiGi has changed significantly. The drastic
change between 2006 and 2007 where we see the debt-equity ratio was increased
from 0.67 to 1.44 was due to the capital repayment done by DiGi in 2007.

3
Turnover Measures 2004 2005 2006 2007 2008
Inventory Turnover Cost of Goods Sold /Inventory 38.16 78.78 94.83 102.66 63.96
Days' Sales in Inventory 365 days /Inventory turnover 9.56 4.63 3.85 3.56 5.71
Receivables Turnover Sales /Accounts Receivables 12.62 13.45 14.55 12.41 11.44
Days' Sales in
receivables 365 days /Receivables turnover 28.92 27.14 25.08 29.42 31.90
Total Asset Turnover Sales /Total Assests 0.81 1.02 1.24 1.48 1.24
In this session, we shall see how efficient DiGi was in dealing with its assets.
Impressively, DiGi‟s inventory turnover was very quick in last 5 years. From 2005 to
2008, DiGi‟s inventory was sold in less than 1 week (Days‟ Sales In Inventory).
Likewise, DiGi needed approximate 1 month to collect outstanding credit accounts
(Days‟ Sales in receivables). DiGi‟s total asset turnover was improving from 0.81 in
2004 to 1.24 in 2008. It means that DiGi was making RM 1.24 sales for every RM 1
in asset in 2008 almost 50% up from 4 years ago. We may conclude that DiGi was
improving in asset management.
Profitability Measures 2004 2005 2006 2007 2008
Profit Margin Net Income /Sales 14.21% 16.33% 22.06% 24.36% 23.69%
Return on Assets ( ROA) Net Income / Total assets 8.90% 11.13% 19.77% 27.40% 24.50%
Return on Equity (ROE) Net Income /Total Equity 17.86% 20.95% 33.19% 67.35% 60.13%
Based on the profit margin of DiGi in last 5 years, we can see that the profit margin
was improved from 14.21% in 2004 to 23.69% in 2008. However, we do not expect
this margin continues to rise due to price pressure and market maturity. And the latest
DiGi 2009 Q3 report only made the forecast more solid by showing deteriorating
profit margin at 19.70% (DIGI : Appexdix 2.0).
1.1 Financial Highlight Summary
Year Ended
31 Dec 2004
RM ‘000
Year Ended
31 Dec 2005
RM ‘000
Year Ended
31 Dec 2006
RM ‘000
Year Ended
31 Dec 2007
RM ‘000
Year Ended
31 Dec 2008
RM ‘000
Revenue 2,233,703 2,884,324 3,652,536 4,362,635 4,814,475
Profit before taxation 446,843 661,550 1,087,139 1,445,314 1,546,896
Net profit 317,355 470,955 805,653 1,062,595 1,140,715
Total assets 3,566,347 4,232,319 4,076,147 3,877,491 4,655,852
Shareholder‟s fund 1,777,193 2,248.148 1,752,401 1,577,645 1,897,172
Long term liabilities 655,546 681,548 685,105 573,791 491,557
Net profit as % of revenue 14.2% 16.3% 22.1% 24.4% 23.7%
EBITDA 43.83% 43.66% 46.40% 48.36% 45.10%

4
EPS (sen) 42.3 62.8 107.4 141.7 148.5
Net tangible assets per
share (sen)
2.30 3.00 2.34 2.10 2.44
According to DiGi‟s financial summary from 2004 to 2008, we are impressed by the
solid growth achieved by the company every year. The revenue growth maintained
double digits except 2008 down to 9% compared to its previous year. EBITDA was
maintained at around 45% every year with peak recorded at 2007 where EBITDA
rose to 48.36%. At the same year, net profit also recorded its best margin at 24.4%.
Likewise, ROA & ROE of 2007 were also the highest in recent years. Therefore, we
may conclude that DiGi was growing rapidly from 2004 to 2007 where its best
performance was recorded in that year but slow down the pace in 2008. We will
explain the reason of the slow down performance in next chart.
1.2 DiGi’s key areas performance
The chart above shows the key areas performance of DiGi from 2004 to 2008. We are
comparing DiGi‟s EBITDA, net income growth and relate them to revenue and
operating cost growth. We notice that DiGi‟s revenue growth was above its cost
before 2008 therefore DiGi achieved year-to-year positive growth in EBITDA and net
income. However, in 2008 the cost was growing faster than revenue resulted EBITDA
and net income fell from its peak at 2007.
1.3 DiGi’s Operating Cash Flow Summary
Although DiGi‟s financial highlight summary shows it‟s profitable, but it‟s still too
early to conclude the company is healthy. In order for a company to be sustainable, its
business not only needs to make profit but also needs to generate enough cash flow to
support daily business operating expenses. Now let‟s look at DiGi‟s operating cash
flow from 2004 to 2008 as below:

5
Year Ended
31 Dec 2004
RM ‘000
Year Ended
31 Dec 2005
RM ‘000
Year Ended
31 Dec 2006
RM ‘000
Year Ended
31 Dec 2007
RM ‘000
Year Ended
31 Dec 2008
RM ‘000
(1) Operating
profit/(loss) or
EBIT
509,427 675,831 1,066,899 1,428,760 1,535,137
(2) Depreciation 465,553 579,449 584,581 598,566 572,940
(3) Tax expense 129,488 190,595 281,486 382,719 406,181
(4) OCF
(1) + (2) – (3)
845,492 1,064,685 1,369,994 1,644,607 1,701,896
As shown by the chart diagram above, DiGi‟s operating cash flow was improving
since 2004 from RM 845 million to RM 1.7 billion in 2008. Therefore we could
conclude that DiGi is a profitable and healthy company.
2.0 DiGi’s 3G project: Capital Budgeting and
Discounted Cash Flow evaluation
On 14 November 2007, a strategic alliance was announced between DiGi and Time
dotcom Berhad to have 3G license transferred from Time dotCom to DiGi; meanwhile
with 27.5 million of DiGi shares acquired by Time dotcom. In order to achieve the 3G
license, DiGi has initial investment of 27.5 million of shares which equivalent to RM
695 billion (RM25.20 per share at that point of transaction happened). After 3G
spectrum transaction was completed on May 7, 2008, DiGi announced that additional
CAPEX of RM 600 million to RM 800 million in the first 3 years (of which RM 150
million to RM 200 million is expected in 2008) will be invested in 3G infrastructure.
In this session, we will evaluate DiGi‟s 3G project via capital budgeting as well as
discounted cash flow methods to justify whether the said project shall be taken or not.
In this evaluation, straight line depreciation will be used. Government tax rate is 26%
and discount rate of cash flow is 5.8%. We proposed RM 10 million of initial working
capital and 8% of yearly revenue will be used as net working capital in the subsequent

6
years as project expansion occurs. However, all working capital is assumed to be
recovered at the end. The evaluation period is 10 years since the license will be
expired in early 2018.
The capital budgeting analysis of the project is as below:
WORKING CAPITAL RM’000
Initial Investment in Work.
Cap= $10,000
Working Capital as % of Rev= 8%
Salvageable fraction at end= 100%
Year 0
RM’000
Year 1
RM’000
Year 2
RM’000
Year 3
RM’000
Year 4
RM’000
Year 5
RM’000
Year 6
RM’000
(1) Revenue 0 38,800 168,480 324,000 518,400 777,600
(2) Cost 200,000 300,000 300,000 100,000 100,000 300,000
(3) EBITDA
[(1) – (2)]
(200,000) (261,200) (131,520) 224,000 418,400 477,600
(4) Depreciation 69,500 69,500 69,500 69,500 69,500 69,500
(5) EBIT
[(3) – (4)]
(269,500) (330,700) (201,020) 154,500 348,900 408,100
(6) Tax @ 26% (70,070) (85,982) (52,625) 40,170 90,714 106,106
(7) EBIT(1-t)
[(5) – (6)]
(199,430) (244,718) (148,755) 114,330 258,186 301,994
(8) + Depreciation 69,500 69,500 69,500 69,500 69,500 69,500
(9) - ∂ Work. Cap (10,000) (6,896) 20,374 12,442 15,552 20,736
(10) Total CF
[(7) + (8) + (9)]
(705,000) (119,930) (168,322) (99,629) 171,388 312,134 350,758
(11) Discount Factor 1 1.058 1.119364 1.184287 1.25297 1.32564 1.40253
(12) Discounted CF (705,000) (113,355) (150,373) (84,126) 136,785 235,458 250,088
Year 7
RM’000
Year 8
RM’000
Year 9
RM’000
Year 10
RM
’000
(1) Revenue 1,036,800 1,296,000 1,555,200 1,814,400
(2) Cost 300,00 100,000 50,000 50,000
(3) EBITDA
[(1) – (2)]
736,800 1,196,000 1,505,200 1,764,400
(4) Depreciation 69,500 69,500 69,500 69,500
(5) EBIT
[(3) – (4)]
667,300 1,126,500 1,435,700 1,694,900
(6) Tax @ 26% 173,498 292,890 373,282 1,694,900
(7) EBIT(1-t)
[(5) – (6)]
493,802 833,610 1,062,418 1,254,226
(8) + Depreciation 69,500 69,500 69,500 69,500
(9) - ∂ Work. Cap 20,736 20,736 20,736 20,736
(10) Total CF 542,566 882,374 1,111,182 1,302,990
INITIAL INVESTMENT RM’000
Initial Investment= $695,000
Opportunity cost (if any)= $0
Lifetime of the investment 10
Salvage Value at end of project= $0
Deprec. method Straight line
Tax rate on net income 26%
Discount Rate 5.8%

7
[(7) + (8) + (9)]
(11) Discount Factor 1.483883 1.569948 1.661005 1.757343
(12) Discounted CF 365,639 562,040 668,982 824,052
NPV = RM 1,990,190,000
IRR = 22.12 %
As we may see the project cash flow will be only positive after 3 years due to low
subscribers‟ base and heavily network expansions.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
BB Subs 0 30000 130000 250000 400000 600000 800000 1000000 1200000 1400000
BB ARPU 0 1296 1296 1296 1296 1296 1296 1296 1296 1296
Revenue
(RM)
0 38800 168,480 324,000 518,400 777,600 1,036,800 1,296,000 1,555,200 1,814,400
BB = Broadband
ARPU: Average Revenue Per User
Project RM „000
Year 0 (705,000)
Year 1 (113,355)
Year 2 (150,373)
Year 3 (84,126)
Year 4 136,785
Year 5 235,458
Year 6 250,088
Year 7 365,639
Total Cash Flow (64,884)
Year 8 562,040
Total Cash flow 497,156
Pay Back period = 7 years & 6 weeks
Though the payback period of the project is very long, but considering the net present
value of the project is approx RM 2 billion therefore we still consider the 3G project
is worthwhile for the investment. Similar conclusion is reached if we are using the
IRR as the project investment measure. IRR of this project is valued at 22.12% which
is higher than discount rate of 5.8 therefore the project should be undertaken.
3.0 Strengths and Weaknesses
One of the key strength of DiGi is the company capability to sustain growth and profit
by generating unbelievable double digit growth from 2004 to 2007. EBITDA of the
company is maintained at 45% every year. Company operating cash flow is very
healthy as well. Such an impressive financial achievement must thank to the tireless
management team for their continuous innovative approach to their products. As we
all might know, DiGi has been one of the most innovative and creative company in
the country. The famous „Yellow Man‟ is well known in the community. Besides that,
DiGi is actively participating in CSR (corporate social responsibility) activities. As a
result of that, DiGi became the first corporate organization to be awarded the
Anugerah Pendukung Seni by the Ministry of Cultures, Arts and Heritage. All these
efforts actually turned into better corporate image which increases the company
intangible assets. Therefore, we see their subscriber base grew from around 3 million
subscribers in 2004 to 7 million subscribers at the end of 2008.

8
One of the main reason of DiGi‟s share becomes the favorite of investors is their high
dividend payout policy. DiGi even paid more dividend than EPS in year 2007 and
2008 due to excess cash in hand. This indicates that DiGi has turned into „cash cow‟
position since 2007. Due to high market penetration and less expansion is required,
DiGi announced to increase their payout ratio to at least 85% of their net profit since
Q3 2009.
However, one of the key weaknesses of DiGi is their poor financial short term
solvency. In spite of strong cash flow of the company, DiGi‟s current ratio, quick
ratio and cash ratio have been deteriorating in recent year. Besides that, price pressure
and high market penetration may erode future revenue growth. Though in some
developed nations the market penetration can go up to 140%, but the room for growth
is very limited due to highly competitive market and lower profit margin.

9
Another concern we would like to raise here is DiGi‟s operating cost grows faster
than revenue in recent years. As future revenue growth is limited, higher cost margin
will further dampen the net profit of the company.
4.0 Recommendations
As mobile voice market penetration has exceeded 100% (116% in Q2 2009), business
focus and strategy of DiGi shall shifted from traditional voice traffic to data traffic.
By looking at the low broadband market penetration at only 21.10% last year,
broadband business is certainly the next drive of growth in the telecommunication
industry (Appendix 3-5). Therefore, DiGi must grasp the next wave of change in
order to sustain the growth in future.
Cost efficiency campaign must be launched to counter fast growing operating cost.
DiGi may re-structure its business units into smaller size and consolidate redundant
functional groups into fewer groups to reduce cost. In short run, marketing expenses,
O&M expenses, CSR expenses should be revised to control variable cost. In long run,
low productivity plants should be considered to shut down in order to control fix cost.
As DiGI‟s biggest customer segment is foreign workers, therefore the company
performance is more vulnerable to global economy down turn. It‟s time for DiGi to
redefine their customer segments and shift the focus from heavily rely on single
segment to multiple market segments.

10
Malaysia Airline System

11
Reporting Period
Financial Ratios
FORMULA
Liquidity Measures 2004 2005 2006 2007 2008
Short Term Solvency
Current Ratio Current Assests /Current liabilities 1.25 0.83 0.82 1.4 1.36
Quick Ratio Current Assests -Inventory /Current liabilities 1.14 0.72 0.74 1.33 1.28
Cash Ratio Cash /Current liabilities 0.64 0.28 0.32 1.00 0.72
Financial Leverage
Long Term Solvency
Total Debt Ratio Total Assests - Total Equity /Total Assets 0.52 0.68 0.74 0.62 0.60
Debt-eqity ratio Total Debt/Total Equity 1.08 2.12 2.85 1.63 1.5
Equity multiplier Total assests /Total Equity 2.08 3.13 3.85 2.63 2.5
Turnover Measures
Inventory Turnover Cost of Goods Sold /Inventory 20 20.2 31.6 35.2 36.2
Days' Sales in Inventory 365 days /Inventory turnover 18 18 12 10 10
Receivables Turnover Sales /Accounts Receivables 4.43 4.21 5.29 7.3 6.64
Days' Sales in
receivables 365 days /Receivables turnover 82 87 69 50 55
Total Asset Turnover Sales /Total Assests 1.14 1.25 1.68 1.3 1.33
Profitability Measures
Profit Margin Net Income /Sales 0.08 0.03 -0.02 0.07 0.02
Return on Assets ( ROA) Net Income / Total assets 0.1 0.04 -0.03 0.89 0.02
Return on Equity (ROE) Net Income /Total Equity 0.19 0.08 -0.11 0.23 0.06
Market Value
Measures
EPS Net Income / Shares outstanding 36.8 26 (10.9) 58.0 14.6

12
2004 2005 2006 2007 2008
Cash Flow Statement RM'000 RM'000 RM'000 RM'000 RM'000
Net cash (used in)/generated from 1,099,856 -610,599 -175,311 2,319,123 -632,584
operating activities
Net cash generated from/(used in) 157,890 -377,361 -471,573 358,890
-
1,353,415
investing activities
Net cash generated from /(used in) 0 -31,331 1,050,000 991,842 490,812
financing activities
NET INCREASE / ( DECREASE) IN CASH 1,257,746 -1,019,291 403,116 3,669,855
-
1,495,187
AND CASH EQUIVALENTS
The above date shows the ratios anlaysis and cash flow statement in generating/
(used) cash from operating, financing and investing activities from 2004 to 2008.
Based on the abpove data we can see that, during 2004 and 2007 MAS has net cash
generated from operating, financing and investigating activities as it shows positive
values as compare to year 2005, 2006 and 2008. This indicates that there is huge
decrease in current assests and increase in account liaibilities in generating cash.
However, in year 2005 all acitivities shows net cash used and decrease in cash due to
financial crisis and also due to high operational and fuel costs. (MAS: Appendix 3.0).
We will further discuss on the findings and impact based on the historical and
financial date as below.
Malaysia Airlines Financial Highlights
Year
Ended
Revenue Expenditure Profit/(Loss) Shareholders
EPS after
tax
(RM '000) (RM '000)
after Tax (RM
'000)
Fund (RM
'000) (cents)
31-Dec-04 11,364,309 11,046,764 ▼326,07 3,318,732 ▼26.0
31-Dec-05 9,181,338 10,434,634 ▼(1,251,603) 2,009,857 ▼(100.20)
31-Dec-06 13,489,549 13,841,607 ▼(133,737) 1,873,452 ▼(10.90)
31-Dec-07 15,288,640 14,460,299 ▲852,743 3,934,893 ▲58.05
31-Dec-08 15,503,714 15,259,027 ▼245,697 4,186,000 ▼14.62
Based on the historical data for the financial Year ending 2004 to 2008 MAS has
shown less performance in generating profit due to financial crisis incurred in 2005.
As we aware, MAS was reported a loss of over RM1.3 billion for the Financial Year
2005. It was unacceptable to many parties such as the stakeholders and the
government especially the announcement was made at the same time as some of MAS
regional competitors reported strong profits in the same year. As a results, the airlines

13
was expected to cut up to 5,000 jobs and spend a maximum of 850 million ringgit
(US$236 million; euro198 million) in compensation packages as part its plan to return
to profitability. The retrenchement was a measure to reduce cost due to crippling fuel
prices and lower load factors. The carrier was also battling a cash shortage,
overstaffing and an inefficient and unprofitable route network. However, as of
February 2006, MAS reached profitability by 2008 where it posted a gross profit of
240Mil for the 3rd
quarter ending September 2006. This has been successfully
achieved due to implementation of Business Turnaround Plan (BTP) which has also
provided more recommendations for battling their dwindling sales.
Although in 2005 MAS reported loss however, by comparing the current ratio from
2004 to 2008 it explains that in year 2007 and 2008 has higher current ratio as
compare to 2004 to 2006. This indicates that‟s the total revenue increase
dramastically from year 2004 to 2008 (RM 7,306,476,000 to RM 13,247,237,000).
2.0 Current Data Analysis
Fundamental Strength
Strength
EPS Growth Strength 55.37
Profit Growth Strength 61.50
Revenue Growth Strength -1346.11
Margin Strength 868.14
ROE Strength 82.31
SMR Strength -123.32
Funda Strength -55.76
Stability
EPS Growth Stability 99
Profit Growth Stability 99
Revenue Growth Stability 17
Margin Stability 7
ROE Stability 99

14
ROE (Return On Equity)
Year EPS (RM) NTA (RM) ROE
30-Sep-2009 0.7883 0.0700 1126.14%
30-Sep-2008 0.2835 2.4700 11.48%
30-Sep-2007 0.5530 2.0000 27.65%
30-Sep-2006 -0.6977 1.4100 -49.48%
MAS have reported a smaller operating loss in the third quarter which amounted to
420.8 million ringgit in April –June due to weak passenger demand and higher costs.
As results, Malaysia Airlines cut its capacity by 12 percent and grounded three planes
in the first half of this year, but there are no plans to further cut capacity or routes.
Based on the latest updates MAS will beat its earnings forecast of RM500 million
ringgit after it agreed to buy fuel at below market rates and cut operating costs. The
airline will get 29 percent of its fuel next year at the rate of $69 for a barrel of crude,
24 percent below the current price and the remainder will be bought at market price.
Therefore, MAS will save 1 billion ringgit next year through reducing sales
commissions, selling more tickets on-line and paying less for ground handling. The
company is cutting costs as it faces greater competition from AirAsia Bhd. and Tiger
Airways Ltd, scheduled to start flights between Singapore and Kuala Lumpur next
year. However, to mitigate the effect of the oil price because it‟s impossible oil prices
to sta such continuously, thus MAS have to make sure that they attract as many
customers to fly with them and increase the load factor.
As results, the airline currently reported a 52 percent profit jump in the third quarter
as passenger revenue climbed and the carrier cut costs. MAS expect that it may
exceed its full year net income target of as much as 700 million rinngit. For the first
nine months, the carrier posted a record 610 million ringgit profit. The carrier spent
3.46 billion ringgit on fuel in the first nine months of the year, 1.1 percent less than a
year earlier. Malaysian Air is about 60 percent hedged for this year at about $62 a
barrel. MAS also do competitive hedging, based on the average market competitors in
the area that they operate. Furthermore, MAS will make sure that they put up their
fares and fuel surcharges in line with the competition.
Interm of loan factor MAS will increase the proportion of seats sold on each flight to
80 percent from 75 percent next year. The carrier also aims to reduce the turnaround
time at airports for each plane by 5 percent, freeing them up for more flights. Further,
the airline which plans to buy more than 50 narrowbody planes and a similar number
of widebody aircraft plans to replace all its aging fleet to boost fuel efficiency.
Although several action or plan was in placed to boost fuel efficiency national carrier
Malaysia Airlines suffered a net loss of RM 300 million in the 3rd
Quarter mainly
because of wrongway bets on fuel prices as mentioned above. The carrier‟s loss for
the 3 months through September marked a reversal from a RM38 million net profit in
same 3 months of last year. Looses on derivatives contracts used to hedge against
volatile fuel prices totalled RM202 million.

15
MAS hedged 57 per cent of its fuel needs at $90 a barrel for 2009. It has hedged 60
per cent of its fuel needs at $100 a barrel for 2010. Revenue for the quarter fell 28 per
cent to RM2.9 billion, hit by the cuts in ticket prices that airlines made to attract
travellers during the global downturn. Therefore, MAS need to raise fares to boost its
bottom line. Since fare wise, the current low levels are not sustainable in the long
term, MAS would continue to offer competitive and compelling fares.
MAS reported a January to March net loss of 695 million ringgit ($198.5 million)
versus a year earlier profit of 120 million ringgit. It had a first quarter fuel hedging
loss of 557 million ringgit, and an operational loss of 138 million ringgit. This is the
first operational loss for Malaysia Airlines since the third quarter of 2006 as it faced a
triple squeeze; overcapacity, extreme fuel volatility and a global slump which hit
passenger and cargo demand.
Before the latest results, analysts were expecting MAS to post 2009 net profit of 187
million ringgit. MAS shares have risen 6.5 percent this year, trailing a 24 percent gain
on the main Malaysian stock index KLSE.

16
2.1 Capital Budgeting and Investment
To recover from the huge losses occurred in 2005; MAS launched Business
Turnaround Plan as their good capital investment budgeting for future operations
where it has turned losses into profits between 2006 and 2007. When the Business
Turnaround Plan came to an end MAS posted a record profit of 851 million Ringgit
(265 million dollars) in 2007, ending a series of losses since 2005. The result
exceeded the target of RM300 Million by 184%. The Business Turnaround Plan will
turnaround MAS in 2 years, following a series of specific cost and revenue actions,
which had result in a profit of RM500 million in 2008.
NPV= - Initial Cost + CF Yr 2006 + CF Yr 2007
NPV= - 25Mil (1+ R*) 1
(1+ R*) 2
NPV= - 25Mil + (175,311,000) + 2,319,123,000
(1.07) 1 (1.07) 2
NPV= - 25Mil + (163,842,056) + 2,025,611,844
NPV= RM 1,836,769,788 (Positive NPV accpet the project).
This indicates that, to evaluate how effective is this project that result in profit of 851
million Ringgit in 2007 by calculating one of the capital budgeting method that is
NPV as above. The positive NPV summarize that this is a good investment decision
turned the 2005 losses into profit through the BTP project in just 2 Years of period.
R* = “Real” (constant-dollar) interest rate used for economic efficiency impact evaluation of transporation
investment typically range from 4% to 8%. The U.S Office of Management and Budget recommends the use of a
rate of 7% to reprsent the private sector rate of return on capital investment. (Transporation decision making:
Principles of project evaluation and programming by Kumares C.Sinhna, Samuel Labi.
Nevertheless, to increase the profit MAS is expected to announce to buy 55 new
Boeing (narrow-body aircraft worth up to 11 billion ringgit ($3.4 billion) to be
delivered from 2011 onwards, as part of the airline's replacement programme for its
ageing fleet of 111 aircraft. As we aware, Malaysian Airline made a net profit of
851.4 million ringgit last year, snapping two straight years of losses following a
business turnaround plan that has seen better yields and cost reductions. Therfere, by
doing this estimates put the airline's 2008 net profit consensus at 758.5 million ringgit,
rising to 989.7 million in 2009.
To further reduce operating costs to as low as 20 percent over a low cost carrier‟s cost
base over five years MAS aims to continue to implement cost control on redundant
activities and other unnecessary costs that had accumulated over time, weighing down
its profitability. MAS also intend to improve revenue by convincing consumers to pay
30 per cent above a low-cost carrier's fares for a 5-Star Value Carrier. This
implentation is an imporatnt activity because from 2006 to 2008, the airline trimmed
operating costs by RM665 million, RM738 million and RM936 million, respectively.

17
Figure 2: The MAS Way: Business Turnaround Plan
Currently MAS making good investment decisions in provding better services to
customers. In other words, MAS is investing RM 480m in its Passenger Services
System (PSS) over 10 years in an effort to simplify and enhance the travel
experience of customers and also to generate revernues several years for future use
from the raised capital. They believe that, over a period of 10 years it will give
benefits worth over RM2 billion as a future value from now. The airline expects a rise
in online sales this year with the PSS in place. Furthermore, to generate more revenue
in future MAS is now on an integrated SITA platform new reservation system,
allowing customers to enjoy seamless service delivery and a suite of new services
including mobile.
10 Years
PV= RM480m
FV= RM2 billion
FV= PV (1+r) * number of periods
2b = 480m (1+r) *10
2b /480m = (1+r) *10
4.1667 = (1+r) *10
1+r = 4.1667 (1/10)
1+r=1.1533
R = 0.1533
R= 15.33%
Therefore, the capital budgeting for PSS will give a good rteurn over 10years due to
high rate of return 15.33% by investing in this investment together integration with
SITA platform new reservation system.

18
3.0 Strengths and Weakness
Many initiatives taken by MAS to indicate that it has strength to build on. BTP plan
will not only continue to reverse the loss and return MAS to profitability, but also
transform the company into a strong and vibrant institution those aggressively
tackling new opportunities. This further support by the strong short term solvency or
liqudity measures MAS especially in year 2007 and 2008 which indicates that, it has
been showing good progress to pay any short term debt with available current assests.
Apart from ratio anlaysis valuation tools, we also can conclude that MAS have taken
action to improve the growth or increase revenues by implementing several activites
or events inspite of losses incurred due to wrongway bets on fuel prices.In other
words, their major strengths is meeting their customer expectation by providing better
services. MAS would continue to offer competitive and compelling fares.
Furthermore, their plan to invest RM 480m in its Passenger Services System (PSS)
over 10 years in an effort to simplify and enhance the travel experience of customers
and also to generate revernues several years for future use. MAS believe that, by
doing this over a period of 10 years it will give those benefits worth over RM2 billion
as a future value from now. This is both in terms of revenue for customers due to the
enhancement that they are giving as well as better efficiency that they expect to get
from the system. In addition to their capital budgeting plan, PSS enabled MAS to
achieve 100 per cent e-Ticketing. Although this investment projected benefits worth
over RM2 billion however, it also subject to various limitation such as Internet
penetartion wroldwide. In other words, the airline expects a rise in online sales this
year with the PSS in palce but due to system issue it could decline any time which
indicates one of the weaknesses of this projected plan that MAS will be facing in
future.
Although the weakness is the high debt ratio each year however, during year 2007
shareholders expectation would have been met by the management due to high return
on equity (ROE) 23 % as compare to the rest of the years. This is because of higher
profit after tax of RM 852,743,000 in year 2007. This has been achieved due to the
implementaion Business Turnaround Plan that has turned losses into profits between
year 2006 and year 2007. (MAS: Appendix 2.0).
However, interm of long term solvency measures the company‟s have issued more
debt than equity from 2004 to 2008 (2004 -52%, 2005 – 68%, 2006 – 74%, 2007 –
62% and 2008 -60%). This explains that the status of the company‟s capital structure
in which less percent has allocate for equity thus this is one of the weakness of the
company because it debt to equity ratio will determine the value of the company for
future. In other words, company failed to generate more cash flow than it uses as
results, shareholders and bondholders failed to receive dividens and interest when the
initial loan is repaid. Further, it also limits the company to retain the earnings for any
future investments. (MAS: Appendix 4.0).
Moreover, despite the hard work that has been done as of today, MAS is currently in a
much weaker position than our regional peers. This is because their pricing power
significantly lags the industry. The main factor of the losses was high operating costs as
MAS substantially lags its peers on yield and this is their central issue but much of it
is due to weaknesses is their pricing and revenue management, sales and disribution,

19
brand presence in foregin markets and alliance base. In addition, MAS might not have
full flexibility to make changes to destinations or pricing. As results, MAS‟ costs have
risen out of control and showed no signs of flattening.
MAS is cost competitive
MAS has a real revenue disadvantage

20
4.0 Recommendation
Based on the historical and current event or financial issues to become much more
efficient with their resources and also to see a disproportionate increase in cocts, from
corporate finance point of view, we would recommend MAS to show higher
productivity than their peers such as Air Asia and Firefly. This also will help MAS to
survive and prosper in their small revenue enviornment due to high cost factor. From
the financial report analysis, we are more concern about their fixed cost base because
we can conclude based on our findings that, MAS have millions of ringgit invested in
some real estate and equipment through its offices around the world that do not
directly contribute to revenue production. Prompt action has to be taken to continue
improve profitability and also avoid from any losses. Therefore, MAS has to focus on
enhancing customer staisfaction, generating revenue and intensifying cost reductions,
thus in future MAS has to perform or implement effective capital budgeting on how
budget of funds to be invested for future and current operations.
In nutshell, consistent with MAS‟ philosophy of „aiming for the best, and assuming
the worst‟, we believe that they are aimed for the best, stretch their limits and go for
the impossible, to achieve an annual profit of at least RM1.5 billion by 2012 even
after factoring in the industry„s challenges such as overcapacity, air traffic
liberalisation and rising fuel costs.

21
PROTON BERHAD

22
Based on the above-mentioned topics, we will attempt to assess the performance of
Proton Berhad based on historical data that spans from 2005 to 2009 as well as the
current trends.
Figure 1: Excerpt of Balance Sheet as at 31 March 2009, Annual Report 2009
From the data above, we are able to explain the ratio figures below. So far through out
the past five years Proton has maintain between the bracket of [1.80, 2.30] indicating
its financial strength and its liquidity.
Liquidity Measures
2009 2008 2007 2006 2005
Current Ratio 1.81 2.10 2.06 1.89 2.27
Quick Ratio 1.06 1.43 1.23 1.29 1.83
Cash Ratio 0.48 0.74 0.41 0.67 1.11
Table 1: Short Term Solvency Calculation
Short-term solvency provides information about a firm‟s liquidity. According to
Proton‟s current ration from 2005 – 2009, Proton achieved positive net working that
showed able to pay off its short-term liabilities. This is due to Proton‟s steady growth
in the market as a viable player in the global auto industry, however, it has
experienced a declined (not critical plunges but a steady drop in cash ratio). However
over 42% of its equity is owned by a government-owned company Khazanah
Nasional Berhad, making it government-linked allowing it the liberty and safety net
of maintaining a healthy short-term solvency.

23
Figure 2: Excerpt of Balance Sheet as at 31 March 2009, Annual Report 2009
From the data above, we are able to extract and explain the ratio below. So far
through out the past five years Proton has maintain between the bracket of [1.80,
2.30] indicating its financial strength and its liquidity.
Financial Leverage 2009 2008 2007 2006 2005
Total Debt Ratio 0.28 0.25 0.25 0.29 0.33
Equity multiplier 1.39 1.34 1.32 1.41 1.50
Table 2: Long Term Solvency Calculation
Financial advantage ratios as calculated above provide an indication of the long-term
solvency of Proton Berhad. The ratios above help us to measure Proton‟s ability to
service its debt and meet its other obligations. Proton‟s total debt ratio has maintained
in a steady bracket and has remained so for the past five years. From the table above,
we can see that Proton had depended on debts to finance their asset base but that ratio
has been decreasing with a 0.05 hike in year 2009.
Turnover Measures 2009 2008 2007 2006 2005
Inventory Turnover 102.66 83.78 34.94 42.66 63.96
Days' Sales in Inventory 15.6 9.63 3.8 9.56 10.1
Receivables Turnover 12.22 14.55 9.25 12.1 10.14
Days' Sales in receivables 31.92 24.14 20.08 22.42 23.90
Total Asset Turnover 1.59 1.02 0.98 1.48 1.24
Table 3: Turnover Measures
The table above helps s gauge Proton‟s asset management. Proton experienced some
tough times especially in year 2006/2007 when sales dropped, its credibility as a
efficient car maker questioned and customer dissatisfaction. However, Proton expects
2009 net profit to surpass RM200 million, driven by increased sales, operating
efficiency and the launch of new models which will make up for losses incurred
during the previous years.
1.1 Dividend and Shares Analysis
Dividends are payments made by a company to its shareholder members. It is the
portion of profits paid out to stockholders. When a corporation earns a profit, either
that money is re-invested in the business or it is paid to the shareholders as a dividend.
Many corporations like Proton Berhad retain a portion of their earnings and pay the
remainder as a dividend. In a financial market, a share is a unit of account for various

24
financial instruments including stocks, and investments in limited partnerships, and
REITs. The income received from shares is called a dividend. The figure below
depicts the basic earning per share as well as the dividends earned by Proton‟s
shareholders. The figure explains the changes experienced since 2005 up to this year.
Figure 3: Excerpt of Key Financial Indicators, Annual Report 2009
Dividend payout ratio provides an idea of how well earnings support the dividend
payments. More mature companies tend to have a higher payout ratio. A low dividend
payout ratio indicates that a large fraction of the profits were retained invested for
growth. These earnings were channeled into further enhancing their R&D department
as well as the development of Proton City situated at Tanjung Malim, Perak (to be
fully developed in year 2020). Earnings per share serve as an indicator of a company's
profitability. The portion of a company's profit allocated to each outstanding share of
common stock. Below shows the changes experienced in the dividend payout. Proton
had experienced very bad press since year 2007 due to its unfavorable car production
capabilities. It faced a tough competition between with the introduction of “Myvi”,
and “Viva” from Perodua as well as “Swift” from Suzuki. Proton‟s “Savvy” and its
“Gen-2” were considered very weak compared to the other car models. However, with
the introduction of a few new models the latest being “Exora” has managed to breath
in a good flow and vibe into the company brand allowing Proton to redeem itself.
Year 2009 2008 2007 2006 2005
Dividend Payout
Ratio
37.5% - -390.2% 15.5% 58.7%
Earning Per Share 13.65 -15.65 5.72 9.00 0.70
(http://www.mbaware.com/dividend-payout.html)
(http://www.csgnetwork.com/epscalc.html)

25
Figure 3 shown below clearly depict Proton‟s retained earning as well as the net asset
per share. The graphs below explain the company‟s healthy reserve, allowing them to
focus on important areas of business for further improvements. Proton recognized the
key areas of improvement and dwelled in research and development that resulted in
the introduction of new proton models in the market such as
 Proton Saga
 Satria Neo
 Exora
Figure 4: Excerpt of Key Financial Indicators, Annual Report 2009
With the world moving towards green cars, Proton has made a smart decision to
follow suit car giants like Honda in this venture. Proton with its partner Lotus
Engineering would be able to produce a less expensive hybrid system at its newest
plant that has the facilities needed for mass production. Proton is definitely off to a
positive boom in sales with the introduction of new models at highly competitive and
consumer-friendly prices and now its bold step towards green car production.

26
2.0 Capital Budgeting and Cash Flow Evaluation
Proton Berhad-Malaysia‟s official carmaker was found in 1983. Khazanah Malaysia,
the Malaysian government's investment arm, holds about 42.74% of Proton, followed
by the Employees Provident Fund with 15.4 per cent and Petronas with 7.9 per cent.
Table 4: Source MIDF Analysis on Proton Berhad.
Collaboration
Proton Holdings Bhd and Detroit Electric Holdings Ltd recently announced a strategic
licensing and contract assembly agreement that allows Detroit Electric to utilize
PROTON platforms for its production of Pure Electric Cars (PEV).
Under the agreement, Proton will license the use of two platforms - Persona and
Gen.2 - to Detroit Electric, thus making way for them to build its line of Pure Electric
Vehicles (PEV) for the global market. The electric cars will be built in Proton‟s
Tanjung Malim plant.
Proton anticipates RM2b sales boost from this collaboration alone. Proton Holdings
expects to record a revenue of RM2bn over the next four years following its strategic
tie-up with Detroit Electric Holdings Ltd
Sales Distribution Expansion
Proton Holdings Bhd expects 2009 net profit to surpass RM200 million, resulted
driven by increased sales, operating efficiency and the launch of new models. Its net
profit in the first half-ended September 30 2009 rose 42 per cent year-on-year to
RM136.6 million, while revenue was up 11 per cent to RM3.96 billion. In the
financial year ended March 31 2009, it made a net loss of RM320 million on revenue
of RM6.5 billion.

27
Table 4: Source MIDF Analysis on Proton Berhad.
From the table above below we can translate that revenue rose 11.1% with pretax
profit growing at a faster pace (+43.9% year on year), regardless of the strong demand
for the higher margin products led by Exora and Saga. Proton vehicle sales caused an
improved market share at 29%, which proofs to be much better compared with the
total industry volume sales, which experienced a decline of 7%.
For its second quarter ended Sept 30, Proton showed a net profit of RM82.1mil, (14.9
sen a share) compared with RM43.8mil, (8 sen a share) in the previous quarters.
Revenue rose 14% to RM2.1bil from RM1.85bil as the company‟s sales bucked the
industry-wide trend by showing a strong increase.
Improvement on operating profit was largely due to the increase in domestic sales
volume and profit margins that continued to strengthen through a better product mix.
Domestic sales grew by 11% compared with the immediate preceding quarter driven
by the increase in sales of our top three models – the Persona, Saga, and Exora. Apart
from better domestic sales, ongoing efforts to cut cost – the latest through the
rationalisation of its dealer and vendor network
3.0 Strength and Weakness
PROTON was incorporated on 7 May 1983 with three national policy objectives: To
lead the growth of component manufacturing industries, to acquire and upgrade
technology and industrial skills within the automobile manufacturing industry and to
strengthen the international competitiveness of Malaysia's industrial capability.
The failure by Proton to find a foreign partner is a warning signal that it is no longer a
competitive and economically viable entity with current market situation and
questionable management decisions that causes Proton to lose money when other
finds profits.
Therefore, Proton Holdings Berhad latest venture of joining forces with Detroit
Electronics to build Malaysia‟s first green car (Gen-2) is not only a bold move but
also a very smart move as Proton with its partner would be able to produce a less
expensive hybrid system at its newest plant that has the facilities needed for mass
production. Proton is definitely off to a positive boom in sales with the introduction of
new models at highly competitive and consumer-friendly prices and now its bold step
towards green car production

28
Figure 5: Design model of Gen-2; Proton’s Green Car
National car company Proton Holdings Berhad once dominated with a majority share
in the market. It has since not only lost that majority, its sales in unit terms have even
dropped below that of unlisted Perusahaan Otomobil Kedua Berhad (Perodua).
UMW Holdings Berhad is the biggest in the sector, with a market value of RM5.9
billion, compared with Proton's RM1 billion. Although, UMW has an important oil
and gas division, it derives most of its profits from its Toyota division, the most
profitable in the industry. In contrast, Proton reported a loss of RM75 million in the
October - December quarter last year. It is exceeded in market value by Oriental
Holdings Berhad (RM2.3 billion) and DRB-HICOM Berhad (RM1.4 billion), both of
which are diversified motor-based groups.

29
4.0 Recommendation
In conclusion, Proton should continue to seek strategic alliances and further expand
its market globally due to the termination of talks with Volkswagen AG in the year of
2007. We believe Proton needs to integrate more into the global supply chain and the
global market to cement its presence in the industry. We have not attained the kind of
export penetration projected when the company was established. Global motor vehicle
industry was undergoing a consolidation and Proton should be part of this trend.
Figure 6: Stock Watch Snapshot; Bursa Malaysia
Proton should look into venturing into new territories for instance its latest project of
exploring the Chinese market Apart from expecting gains from the China market;
Proton can also seek export growth from other markets in the Middle East and in the
future, India. Proton is already exploring green technology and aims to launch a fleet
programme with the Government where between 50 and 100 of its electric cars used
by the civil service.
Proton should continue to focus on enhancing their returns by investing in the
development of new value-for-money products, expansion into key selected markets
and the execution of operational efficiency initiatives such as the rationalisation of
dealers and suppliers, improvements in quality and capacity optimization,

Capital budgeting examples

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (10)

Similar to Capital budgeting examples

Similar to Capital budgeting examples (20)

Recently uploaded

Recently uploaded (20)

Capital budgeting examples