MDA 4013

INTEGRATED CASE STUDY

CASE 2:
Golden Hope Plantations Berhad: Which project to Invest?

Group Members:
Name Matrix Number
Nurzalikha Binti Othman 1110802
Nur Hazwani Binti Ibrahim 1110815
Norhidaya Binti Jalaludin 1110817
Nur Asmah Binti Wan Idris 1110819
Muhammad Idris Bin Ismail 1110822

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Table Of Contains

Bil. Item Pages

1.0 Executive Summary 3

2.0 Introduction 3

3.0 Term of Reference 4

4.0 Problems/Strategic Option 4,5,6,7

5.0 Financial Evaluation 8,9,10,11,12

6.0 Recommendations 13

7.0 Action Plan 14

8.0 References 15

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1.0 Executive Summary

The generation and evaluation of creative investment proposals is too important a task to be
left to finance specialists instead it is the ongoing responsibility of all managers throughout
the organization. A key aspect in the translation of strategic goals into action plans is the
financial evaluation of investment proposals is called capital budgeting. The achievement of
some strategic objective requires the outlay of money today in expectation of increased future
income.

In the case of Golden Hope Plantation (GHPB), the Board of Director need to bring
out the whole capital budgeting related to the project of both companies. Therefore, a case
study is carried out to bring information of proposed purchase of property division and
international business division. According to the study, a written report to summarize the
situation. Aspects provided highlights in the report include the Strength, Weaknesses,
Opportunity and Threat (SWOT) analysis, financial analysis and additional information.

Based on the SWOT analysis and financial analysis identified, several possible
solutions and action need to aware have been proposed to solve this problem. Finally, the
conclusion that the decision of the best options will be to make a stand on a given case study.
This is very important where the good options would bring the best return to the company
besides increase the shareholders wealth.

2.0 Introduction

Refer to the case of Golden Hope Plantation Berhad (GHPB), the case is about capital
budgeting project. Golden Hope Plantation Berhad had a dilemma on two options for its
business expansions either purchase of the last piece of freehold land in Shah Alam, Malaysia
for property development or the other options was purchase of a refinery facility in
Netherlands.

These two options have different opportunities that brought favorable revenue to the
company. With only RM500 million that was available for investment as advised by Financial
Controller, the Board of Director should consider both options to choose the best one that
would increase the value of the firm to the shareholders.

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3.0 Term Of Reference

The purpose of this report is to help Golden Hope Plantations Berhad make decision of two
options either to purchase last piece of freehold land in Shah Alam or to purchase a refinery
facility in the Netherlands. The preparation of the report included comparison between that
two option in term of SWOT analysis, Net Present Value (NPV), Return On Investment (ROI)
and Payback Period.

4.0 Problems / Strategic Option

Golden Hope Plantations want to expand its operations using its available internal fund. The
company had to choose between two available options whether to purchase the freehold land
or a refinery facility in the Netherlands. The best return to the company will be chosen by the
company because the available internal fund is not enough to support these two options.

The company only provided RM 500 million for the available investment. Moreover,
one of the decision criteria is to maximize shareholders wealth. The company also stated that
they need to get the return within 10 years and will be discounted at 8 percent.

The first option is to purchase the freehold land in Shah Alam. In the past years,
Selangor had shown as the highest number of abandoned housing project. This is might be
seen as a big problem in housing project because it will be a risk for Golden Hope Plantation
Berhad to choose this option and plan a project in Shah Alam, Selangor. Moreover, the
company only provided RM500 million to the available investment but this investments cost
are more than stated amount.

In addition, the second option is to purchase a refinery facility in Netherlands. This

option might involve of additional cost of buying refinery facility because the refinery is
located in Netherlands. The problem is the price of refinery facility might be lower than
freehold land in Shah Alam but the company might have to pay more because of the cost such
as tax and others.

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Company Strengths
(Golden Hope Plantations 1. Listed on the first board of
Berhad) Bursa Saham Malaysia.
2. Has been 161 years in
plantation business.
3. Operating in many
SWOT ANALYSIS countries.
Weaknesses
1. Limited of capital (only
RM500 million available for
invest).
2. Shortage of manpower.

Opportunities Threats

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 Strengths Weaknesses

Unimills B.V. Unimills B.V.

1. Possess best standard in practice in 1. The investment cost RM 300
SWOT ANALYSIS for which certified with ISO 9001 million cash.
Golden Hope (quality management system) &
Plantations Berhad if ISO 14002 (environmental
choose these two management system).
companies (Unimills 2. Have popular brand.
B.V. & Haron Estate)
Haron Estate Haron Estate
1. Freehold tenure piece of former 1. The investment cost about
estate. RM 525 million (High cost &
2. High demand by other property exceeds the limit).
developer. 2. Listed as the highest number
of abandoned housing project.

Opportunities Threats
Unimills B.V. Unimills B.V.
1. High capacity refinery.
2. Has an experience within 85 years.
3. Popular & well-known brand.
4. Enable the GHPB Company to be
closer to customers in Europe.
5. Enhance production capacity.
6. Could boost companys position in
food processing industry.
Haron Estate Haron Estate
1. Strategic location. 1. High competitive advantage.
2. Strong potential development.
3. Modern township surrounded.
4. Highly infrastructure facilitated.

6
PROVE

Number of abandoned housing project

Percentage of number of abandoned housing project in Shah Alam:

23 450 / 114 553 x 100 = 20.47%

This is can proved the statement in swot analysis that Selangor is the highest number of
abandoned housing project. 20% from 100% is quite high percentage and it will be a risk for
the company but they need to consider it with other consideration.

Contribution of Property Division to the Groups turnover from 1996 to 2000:

Division/Year 1995 1996 1998 1999 2000

Property 164 668 43 8122 17 3394 13 1303 127 788
International 114 396 89 622 16 8611 27 2234 245 085
Business

(RM000)

500,000
450,000
400,000
350,000
1995
300,000
1996
250,000
1998
200,000
1999
150,000
2000
100,000
50,000
0
Property International Business

Figure 1
From the bar graph above, it shows that GHPB Company is more stable in doing international
business rather than property development. The international business shows an increasing
number from 1995 to 2000 whereas property development shows the decrease number. So it
can be seen that the company should invest in Unimills B.V.

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5.0 Financial Evaluation

UNIMILLS
NET CASH CUMULATIVE CASH
YR CASH FLOW FLOW FLOW
-
0 -269600000 269600000 -269,600
-
1 28017000 241583000 -241,852,600
-
2 25305000 216278000 -458,130,600
-
3 31331000 184947000 -643,077,600
-
4 33668000 151279000 -794,356,600
-
5 35046000 116233000 -910,589,600
6 35622000 -80611000 -991,200,600
- -
7 -63796000 144407000 1,135,607,600
- -
8 38081000 106326000 1,241,933,600
-
9 40959000 -65367000 1,307,300,600
-
10 44528000 -20839000 1,328,139,600
NPV (YR
10) (RM266,125,835)
IRR (YR10) -1%

HARON ESTATE
NET CASH CUMULATIVE CASH
YR CASHFLOW FLOW FLOW
0 -54362000 -54362000 -54,362
1 -44519000 -54,362
2 -19634000 -19634000 -19,688,362
3 -7100000 -26734000 -46,422,362
4 5875000 -20859000 -67,281,362
5 73663000 52804000 -14,477,362
6 130,603,000 183407000 168,929,638

8
 7 135,174,000 318581000 487,510,638
8 139906000 458487000 945,997,638
9 144802000 603289000 1,549,286,638
10 83763000 687052000 2,236,338,638
NPV ( YR 10) (RM59,558,269)
IRR (YR10) 31%
PAY BACK PERIOD FOR UNIMILLS
YR CASH FLOW CUMULATIVE CASH FLOW

0 (269,600.00)

1 28,017.00 (241,583.00)

2 25,305.00 (216,278.00)

3 31,331.00 (184,947.00)

4 33,668.00 (151,279.00)

5 35,046.00 (116,233.00)

6 35,622.00 (80,611.00)

7 (63,796.00) (144,407.00)

8 38,081.00 (106,326.00)

9 40,959.00 (65,367.00)

10 44,528.00 (20,839.00)

11 48,396.00 27,557.00

12 36,526.00 64,083.00

13 62,026.00 126,109.00

14 68,744.00 194,853.00

15 80,037.00 274,890.00

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Payback
period 9.6

10
 PAY BACK FOR
HARON
ESTATE
CASH FLOW CUMULATIVE CASH
YR (RM'000) FLOW (RM'000)

0 (54,362.00) (54,362.00)

1 (44,519.00) (98,881.00)

2 (19,634.00) (118,515.00)

3 (7,100.00) (125,615.00)

4 5,875.00 (119,740.00)

5 73,663.00 (46,077.00)

6 130,603.00 84,526.00

7 135,174.00 219,700.00

8 139,906.00 359,606.00

9 144,802.00 504,408.00

10 83,763.00 588,171.00

11 86,695.00 674,866.00

12 89,729.00 764,595.00

13 66,426.00 831,021.00

14 55,530.00 886,551.00

15 44,251.00 930,802.00

Payback period 4.6 years

COMPANY UNIMILLS HARON ESTATE

NET PRESENT VALUE :
YEAR 10 (RM266,125,835) (RM59,558,269)
INTERNAL RATE OF RETURN :
YEAR 10 -1% 31%
DISCOUNTED CASH FLOW RM 5,122,000.87 RM 715,564,000.00
PAY BACK PERIOD 9.6 YEARS 4.6 YEARS

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 The figure show that the different result of NPV, IRR, DCF and payback period of
Unimills and Haron Estate.

From the calculation, we use base from the net cash flow. This because the net is the
basic measurement for any cash related. It can be used as flexible calculation that we did not
necessary to do any cash calculation.The step involved in calculating net present value (NPV)
is by: first, determine all cash flows associated with a project or investment and their timing
(e.g., the years in which they will occur). Second, these cash flows can be both negative
(when money is spent) and positive (when money is received). Then, determine an
appropriate interest rate, also known as a discount rate, to bring each future cash flow to its
equivalent present value (PV). Lastly, add the PVs of all cash flows, both positive and
negative. Determining the value of a project is challenging because there are different ways to
measure the value of future cash flows. Because of the time value of money, a dollar earned in
the future wont be worth as much as one earned today. The discount rate in the NPV formula
is a way to account for this. Companies have different ways of identifying the discount rate,
although a common method is using the expected return of other investment choices with a
similar level of risk. On the NPV result show that Haron Estate is better that Unmills wheres
the NPV of Haron Estate higher than Unmills about RM206, 567,566.

IRR, or Internal Rate of Return, is a special application of the logic behind NPV, or
Net Present Value calculations. It is a commonly-used concept in project and investment
analysis, including capital budgeting. The IRR of a project or investment is the discount rate
that results in an NPV of zero. If the actual discount rate (which is the theoretic cost of funds
to the company or investor in question) is lower than the IRR, the project or investment
should be undertaken. The IRR Unimills is quite bad at -1%. Unimills ought to have more
than 8% of IRR like Haron Estate to get a secure return.

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 The payback period of a given investment or project is an important determinant of
whether to undertake the position or project, as longer payback periods are typically not
desirable for investment positions. All other things being equal, the better investment is the
one with the shorter payback period. But, they ignores any benefits that occur after the
payback period and, therefore, does not measure profitability and also they ignores the time
value of money. Haron Estate also shows a good result where Golden Hope only took 4.6
years to settle up the loan at RM715, 564,000 of discounted cash flow. Meanwhile, Unimills
only can pay back the loan in 9.6 years at the lower discounted cash flow around RM
5,122,000.87.

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6.0 Recommendations

In this case (GHPB), the company had two available options for its business expansions,
whether to purchase of the last piece of freehold land in Shah Alam or purchase of a refinery
facility in the Netherlands. The Board of Director (BOD) needed to consider both options in
order to choose the one that would bring the best return to the company and enhance the
shareholders value.

However, the company must consider several condition since the cash in hand is about
RM700 million to make the option between both investment. But we only can use RM500
million since we need the balance for other capital expenditures. So, we recommend to the
GHPB to invest in Haron Estate with cost of RM525 million. Even though the cost is high but
the discounted payback period is within 5 years earlier is faster than Unimills which is 10
years. So that, they can recover the exceeded cost 25 million.

Other than that, we also recommend the company to invest in Haron Estate because of
the strategic location and accessibility the existing KESAS Highway and Federal Highway as
well as the proposed new West Coast Expressway. So the Haron Estates location is better
rather than location of Unimills which is at Netherland and far away from Golden Hope
plantation. But unfortunately, Selangor was listed as the highest number of abandoned
housing project by state as at 2001. Thats mean, it will be a risk to the GHPB if they invest in
Haron Estate and the housing project will be abandoned.

On the other hand, we also recommend the GHPB Company to invest in Unimills B.V.
If the company invests in Unimills B.V., the cost of investment RM300 million is lower than
Haron Estate and below from the available amount for investment as advised by the Financial
Controller. Then, they can keep or use the balance of RM200 million for another investment.

Besides that, the company will get big opportunity because Unimills B.V. had refined
edible oil for cooking fats more than 10 countries and the brands of Bertolli was popular in
Australia, Brazil, North America and key European markets. So, it will give a big chance to
the GHPB Company if they invest in Unimills to expanding the business wisely. The NPV of
Unimills is RM266,125,835 which is higher than Haron Estate, RM59,558,269. But, the
location of refinery facility in Netherlands is quite far and might include additional cost.

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7.0 Action Plan

There are several aspects that need to take into account upon deciding to invest to Unimills
B.V by purchasing its refinery facilities in Netherlands. In order to achieve its global
marketing strategy, several action plans need to be carried out.

Firstly, as other subsidiaries of Golden Hope in food-based industries such as Golden

Hope Jomalina Food Industries Sdn. Bhd. and Golden Hope Fruits Industries Sdn. Bhd. have
been maintained their certifications to Hazard Analysis and Critical Control Points (HACCP),
Golden Hope should also be prepared to formalize the HACCP system of Unimills to acquire
and maintain the certifications to HACCP. This is very imperative action to be taken care of
to ensure that there is no issue regarding biological, chemical, and physical hazards in
production processes that can cause the finished product to be unsafe. In order to acquire this
level, Golden Hope should designs several points of measurements to reduce these risks to a
safe level.

Secondly, it is very crucial for both Golden Hope and Unimills to be certified by
related standards in order to maintain their performance in term of operations and
management. Golden Hope should be prepared to apply for ISO 14001 Environment
Management System, in which provides practical tools for companies and organizations
looking to identify and control their environmental impact and constantly improve their
environmental performance. By using this standard, Golden Hope can provide assurance to
company management and employees as well as external stakeholders that environmental
impact is being measured and improved.

There are significant benefits by using this standard, which include greater awareness
and participation of employees on the need to conserve the environment, and ability for total
compliance with relevant environmental laws and regulations, reduced cost of waste
management, savings in consumption of energy and materials, lower distribution costs,
improved corporate image among regulators, customers and the public. These are very
important to Golden Hope in order to place a maintaining performance in terms of financial
and management after purchasing the refinery machine of Unimills B.V.

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8.0 Appendices
1) http://announcements.bursamalaysia.com/EDMS%5CAnnWeb.nsf/LsvAllByID/4
82568AD00295D0748256AEF0040AC73?OpenDocument

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