BPK 30902 ENGINEERING ECONOMY

SEMESTER 1, 2018/2019

FINAL REPORT
“CONSTRUCTION OF FOOD HUB PAGOH”

GROUP MEMBERS : SHAFIQAH BINTI ABU HASAN (DN160104)

AINA’ NAJWA BINTI ZAINUDDIN (DN160183)

SARINAH BINTI BASIL (DN160195)

NUR IZZYANIE BBINTI MOHD AZLI (DN160068)

NORAZEAN BINTI MAD ZIN (DN160046)

SYAZA SYAZEERA BINTI ZAHID (DN160346)

SECTION : SECTION 28

LECTURER : DR. MOHD ARIF BIN ROSLI

CONTENT

TITLE PAGE NUMBER

1.0 INTRODUCTION
1.1 Project Information 4
1.2 Concept Of The Building 5
2.0 WORK BREAKDOWN STRUCTURE
2.1 Introduction Work Breakdown Structure (Wbs) 7
2.2 Work Breakdown Structure In Build Bungalow 8
2.3 Cost Analysis 10
2.4 Estimation Cost Based On Wbs 11
2.5 Conclusion 14
3.0 CASH FLOW
3.1 Cash Flow Significance 15
3.2 Cash Flow Diagram 16
4.0 LIFE CYCLE COST
4.1 Meaning of the LCC 17
4.2 Characteristic Of Life Cycle 17
4.3 Stages Of Life Cycle Cost 18
4.4 Benefits Of Life Cycle Costing 19
4.5 Process Of Life Cycle Costing 19
4.6 Life Cycle Cost Calculation 20
5.0 PROJECT FINANCE ANALYSIS
5.1 Debt And Equity 24
5.2 Equity 25
5.3 Different Between Debt And Equity 27
5.4 Project Finance Analysis Calculation 28
5.5 Calculation Of Equity 29
5.6 Marr 30
6.0 RELEVANT EXAMPLE 32
7.0 CONCLUSION 40
8.0 REFERENCE
9.0 APPENDIX
1.0 INTRODUCTION

According the task of Economy engineering project that was given, our group
required to design a new project that our company may invest in and to produce a report to
advise the management of the company on the cost and financing of the project where our
group appointed as part of the Project Management Office department of a company.

FOOD HUB PAGOH is one of decision that we want to construct at Pagoh area
where this building like high cost of 3-storey commercial building with good facilities.
This project had estimate around RM 6 million by method equity or debt to gain the capital.
Weighted Average Cost of Capital (WACC) was applied in this project which come from
the combination of debt and equity and it known as the rate a company that expect to pay
on average to shareholders. However that are several method of calculation in calculate
while predict of the risks and returns when invest in the investment of project such as
Weighted Average Cost of Capital (WACC), Life Cycle Cost (LCC), Work Breakdown
Structure (WBS), and Cash-Flow Diagram (CFD) that have to consider before take the
decision.

Life Cycle Cost (LCC)

Life cycle cost are known as the sum of all recurring and one-time that costs over
the full life span or a specified period of a good, service, structure, or system that including
the installation cost, maintenance or operating cost and purchase price.

Work Breakdown Structure (WBS)

Then work breakdown structure (WBS) is a key project deliverable that organizes
the team's work into manageable sections.

Cash Flow Diagram (CFD)

As we know the Cash flow diagram visually represent the income and that expenses
over some time interval where the cost and expenses are shown. Horizontal line with mark
on the time intervals was consists in diagram.

3
1.1 Project Information
BACKGROUND COMPANY Company Name: Mudajaya Group Berhad

Company Address: Jalan Pju 7/3, Mutiara

Damansara, 47810 Petaling Jaya Selangor

CIDB: 2070415-SF028879

PKK: 2070415-SF028879

SSM: 2070415-SF028879

INFO OF PROJECT Project: Proposed Construction of

commercial building 3 storey

Location: Pagoh

Area Base: 6,000 square feet

DURATION CONTRACT AND COST Construction cost : RM 5,500,000.00

Contract Duration: 2 year

INSURANCE General Liability Insurance: CIMB bank

Coverage: by percentage until the project completed

METHOD OF PROJECT FINANCING Debt : 30%

Equity: 70 %

4
1.2 CONCEPT OF THE BUILDING

Design of Food hub Pagoh

PROJECT DESCRIPTION
LOCATION PAGOH

CONCEPT OF High-cost of commercial building: 3-storey of commercial

BUILDING building that include
 First floor: Food court hall (8 store with sitting area)
 Second floor: 2 store of franchise restaurant
(McDonald’s and KFC)
 Third floor: Entertainment hall
 Toilet: 3 restroom including the toilet for disabled
person.
 Others: 70 parking and decoration landscape around
the outside building.

5
COST Estimate cost = Rm 6 Million
Construction cost = Rm 5.5 MILLION
Debt: Rm 1,800,000.00 per year
Rent: Rm 780,000.00 per year.
Profit: Rm 144,000.00 per year.

PROJECT FINISH Estimate project complete: 2 years

Project fully complete: 1 year 10 months

Table : Summary of Project Concept

6
2.0 WORK BREAKDOWN STRUCTURE

2.1 Introduction Work Breakdown Structure (Wbs)

A project Work Breakdown Structure (WBS) is a key component of project

management deliverables. A project WBS is used for breaking down a project into
easily manageable components, or bites. Here we’ll break down the process for
you, making it easy to use these structures in your project planning.

The Project Management Body of Knowledge (PMBOK 5) defines the work

breakdown structure as an “A hierarchical decomposition of the total scope of work
to be carried out by the project team to accomplish the project objectives and create
the required deliverables.”

It is common for work breakdown structure elements to be numbered

sequentially to reveal the hierarchical structure. The purpose for the numbering is
to provide a consistent approach to identifying and managing the WBS across like
areas regardless of supplier or trade (in construction).

The project team creates the project work breakdown structure by

identifying the major functional deliverables and subdividing those deliverables
into smaller systems and sub-deliverables. These sub-deliverables are further
decomposed until a single person can be assigned. At this level, the specific work
packages required to produce the sub- deliverable are identified and grouped
together. The work package represents the list of tasks or "to-dos" to produce the
specific unit of work. If you've seen detailed project schedules, then you'll
recognize the tasks under the work package as the "stuff" people need to complete
by a specific time and within a specific level of effort.

7
2.2 WORK BREAKDOWN STRUCTURE IN
BUILD FOOD HUB PAGOH

8
 Commercial Building 3-Storey

Substructure Super Structure Finishes Fittings & Services External works

Furnishings

Work Below Lowest Frame Internal Wall

Finishes Sanitary Site Work
Floor Finish RM393,784.5
RM363,003.00 Appliances RM825,701.
RM523,603.00 0
Fittings & RM91,803.9 50
Upper Floors
Furnishings 0
RM233,104.20
Internal Floor RM303,004.20 Drainage
Finishes Plumbing RM154,982
Roof
RM275,975.40 Installation .40
RM213,070.80
RM318,687.
75
Stairs Internal Ceiling External
RM123,840.40 Finishes services
RM117,003.00 Refuse Disposal RM95,582
RM51,354.50 .10
External Walls
RM110,705.10
External Finishes
RM198,425.70 Electrical
Windows &
Installation
External Doors
RM279,403.6
RM241,337.40
0

Internal Walls & Communication

Partitions Installation
RM180,425.04 RM171,900.60
9
Internal Doors
RM161,940.60
2.3 Cost Analysis

The following is the cost used to carry out this project :

1. Preliminary cost
 A preliminary cost has a value about 13% of total construction cost.

2. Design cost
 A design cost has a value about 9.3% of total construction.

3. Construction cost
 Total cost for build a commercial building.

Calculation

1. Preliminary cost
Preliminary cost = 13% x RM 5,428,638.69 = RM 705,723.03

2. Design cost
Design cost = 9.3% x RM 5,428,638.69 = RM 504,863.40

3. Construction cost
The table below shows the cost of commercial building:
Construction cost = RM 5,428,638.69

10
2.4 ESTIMATION COST
BASED ON WBS

11
Element Cost (RM)
1. Substructure
1A. Work Below Lowest Floor Finish 523,603.00
523,603.00

2. Super Structure
2A. Frame 393,784.50
2B. Upper Floors 233,104.20
2C. Roof 213,070.80
2D. Stairs 123,840.40
2E. External Walls 110705.10
2F. Windows & External Doors 241,337.40
2G. Internal Walls & Partitions 180425.04
2H. Internal Doors 161,940.60
1,658,208.04

3. Finishes
3A. Internal Wall Finishes 363,003.00
3B. Internal Floor Finishes 275,975.40
3C. Internal Ceiling Finishes 117,003.00
3D. External Finishes 198,425.70
954,407.10

4. Fittings & Furnishings

4A. Fittings & Furnishings 303,004.20
303,004.20

5. Services
5A. Sanitary Appliances 91,803.90

12
 5B. Plumbing Installation 318,687.75
5C. Refuse Disposal 51,354.50
5D. Electrical Installation 279,403.60
5E. Communication Installation 171,900.60
913,150.35

6. External works
6A. Site Work 825,701.50
6B. Drainage 154,982.40
6C. External services 95,582.10
1,076,266.00

Total (RM) 5,428,638.69

13
 2.5 Conclusion

Work breakdown structure (WBS) in construction of building have

advantages and disadvantages. The advantage of work breakdown structure is
easy to define, organize, and manage the manage. After that, it also can
improves the efficiency of the project. Third, it can helps to estimate the
resources required, such as cost, time, staff and etc. Beside that, it easy
allocation of resources based on the importance of the task.

For the disadvantage of work breakdown structure is requires active

management of interfaces because it provide to understand it. Second, increased
work burdens on management and management functions like planning,
organising, monitoring, and review. The work breakdown structure (WBS) is a
bit difficult and complicated for create it. Project managers must determine the
precise amount of detail to be included in the WBS. Too little and the project
lacks definition. Too much and the project becomes too bureaucratic.

3.0 CASH FLOW

14
 Cash flow diagram represents the flow in and out of the expenses and costs
throughout the duration of a business project. The time line is a horizontal line divided
into equal periods such as days, months, or years which in this case, the expected
duration of this project was 3 years. Each cash flow, such as a payment or receipt, is
plotted along this line at the beginning or end of the period in which it happens. The
outgoings of money are negative cash flows that are represented by arrows which
extend downward from the time line with their bases at the appropriate positions along
the line. Funds that are received are positive cash flows represented by arrows
extending upward from the line.

3.1 Cash flow significance

A cash flow statement is a listing of cash flows that occurred during the
past accounting period. A projection of future flows of cash is called a cash flow
budget. Managing cash flow control in a construction project is a complicated
process because the activities have to be carefully planned, monitored and
matched against the project plans and the budget. The funding for the
undertaking should come from the building owner, and improper utilization or
inadequate inflow may affect the company’s own cash position if expenses are
not carefully monitored.

There are three areas on which the project manager should focus:

 The plan for utilization wherein the budget plans should be strictly
implemented because estimates have already taken into consideration the
variables.
 The cash flow status report, which provides a summary for monitoring the
cash inflows and outflows. Through this report, the manager will be able to
perceive at a glance if the budget is being closely implemented and if cash
inflow coming from the client is timely and sufficient.
 The company’s financial statement will show that the process of managing
the cash flow control in a construction project has implemented the cost
controls as planned. It will also disclose fund adequacy or inadequacy —
where negative results would prompt the management to thresh-out the
matter with the client before proceeding with the project.

15
 3.2 CASH FLOW DIAGRAM

Calculations for inflows

 RM6,000,000.00 (initial cost) + RM 2,000,000.00 (bank loan per year)

=RM6, 200,000.00

 RM6,000,000.00 (initial cost) + RM144,000.00 (profit)

=RM6, 144,000.00

Calculation for outflows

 RM5,500,000.00 (actual cost) ÷ 3 years

=RM1, 833,333.33

16
4.0 LIFE CYCLE COST

4.1 Meaning of the LCC

Life cycle costing is the process of compiling all costs that the owner or producer of an
asset will incur over its lifespan. The concept applies to several decision areas. In capital
budgeting, the total cost of ownership is compiled and then reduced to its present value in order
to determine the expected return on investment (ROI) and net cash flows. This information is
a key part of the decision to acquire an asset. In the procurement area, the purchasing staff
seeks to examine the total cost of ownership of an asset in order to place orders for those items
that are the least expensive, in aggregate, to install, operate, maintain, and dispose of. In the
engineering and production areas, life cycle costing is used to develop and manufacture goods
that will have the least cost to the customer to install, operate, maintain, and dispose of. In the
customer service and field service areas, life cycle costing is focused on minimizing the amount
of warranty, replacement, and field service work that must be performed on products over their
useful lives. Life cycle costing is more heavily used by businesses that place an emphasis on
long-range planning, so that their multi-year profits are maximized. An organization that does
not pay attention to life cycle costing is more likely to develop goods and acquire assets for the
lowest immediate cost, not paying attention to the heightened servicing costs of these items
later in their useful lives.

4.2 CHARACTERISTIC OF LIFE CYCLE

a. Product life cycle costing involves tracing of costs and revenues of a product over several
calendar periods throughout its life cycle.

b. Product life cycle costing traces research and design and development costs and total
magnitude of these costs for each individual product and compared with product revenue.

c. Each phase of the product life-cycle poses different threats and opportunities that may require
different strategic actions.

d. Product life cycle may be extended by finding new uses or users or by increasing the
consumption of the present users.

17
4.3 STAGES OF LIFE CYCLE COST

Following are the main stages of Product Life Cycle:

(i) Market Research: It will establish what product the customer wants, how much he is
prepared to pay for it and how much he will buy.

(ii) Specification: It will give details such as required life, maximum permissible maintenance
costs, manufacturing costs, required delivery date, expected performance of the product.

(iii) Design: Proper drawings and process schedules are to be defined.

(iv) Prototype Manufacture: From the drawings a small quantity of the product will be
manufactured. These prototypes will be used to develop the product.

(v) Development: Testing and changing to meet requirements after the initial run. This period
of testing and changing is development. When a product is made for the first time, it rarely
meets the requirements of the specification and changes have to be made until it meets the
requirements.

(vi) Tooling: Tooling up for production can mean building a production line; building jigs,
buying the necessary tools and equipment’s requiring a very large initial investment.

(vii) Manufacture: The manufacture of a product involves the purchase of raw materials and
components, the use of labour and manufacturing expenses to make the product.

(viii) Selling

(ix) Distribution

(x) Product support

(xi) Decommissioning: When a manufacturing product comes to an end, the plant used to build
the product must be sold or scrapped.

18
4.4 BENEFITS OF LIFE CYCLE COSTING

Following are the main benefits of product life cycle costing such as it results in earlier
action to generate revenue or lower costs than otherwise might be considered. There are a
number of factors that need to be managed in order to maximize return in a product. Besides
that, better decision should follow from a more accurate and realistic assessment of revenues
and costs within a particular life cycle stage. LCC can promote long term rewarding in contrast
to short term rewarding and also it provides an overall framework for considering total
incremental costs over the entire span of a product.

4.5 PROCESS OF LIFE CYCLE COSTING

Life cycle costing is a three-staged process. The first stage is life cost planning stage
which includes planning LCC Analysis, Selecting and Developing LCC Model, applying LCC
Model and finally recording and reviewing the LCC Results. The Second Stage is Life Cost
Analysis Preparation Stage followed by third stage Implementation and Monitoring Life Cost
Analysis.

The three stages are:

Life Cycle Costing Process

Life Cycle Costing Process:

LCC Analysis is a multi-disciplinary activity. An analyst, involved in life cycle costing, should
be fully familiar with unique cost elements involved in the life cycle of asset, sources of cost
data to be collected and financial principles to be applied.

He should also have clear understanding of methods of assessing the uncertainties associated
with cost estimation. Number of iteration may be required to perform to finally achieve the

19
result. All these iterations should be documented in detail to facilitate the interpretations of
final result.

Stage 1: LCC Analysis Planning:

LCC Analysis Planning

The Life Cycle Costing process begins with development of a plan, which addresses the
purpose, and scope of the analysis.

The plan should:

i. Define the analysis objectives in terms of outputs required to assist a management

decision.

Typical objectives are:

a. Determination of the LCC for an asset in order to assist planning, contracting, budgeting or
similar needs.

b. Evaluation of the impact of alternative courses of action on the LCC of an asset (such as
design approaches, asset acquisition, support policies or alternative technologies).

c. Identification of cost elements which act as cost drives for the LCC of an asset in order to
focus design, development, acquisition or asset support efforts.

20
 ii. Make the detailed schedule with regard to planning of time period for each phase,
the operating, technical and maintenance support required for the asset.

iii. Identify any underlying conditions, assumptions, limitations and constraints (such
as minimum asset performance, availability requirements or maximum capital cost limitations)
that might restrict the range of acceptable options to be evaluated. Identify alternative courses
of action to be evaluated.

iv. Identify alternative courses of action to be evaluated. The list of proposed

alternatives may be refined as new options are identified or as existing options are found to
violate the problem constraints.

v. Provide an estimate of resources required and a reporting schedule for the analysis
to ensure that the LCC results will be available to support the decision-making process for
which they are required.

Next step in LCC Analysis planning is the selection or development of an LCC model that will
satisfy the objectives of the analysis. LCC Model is basically an accounting structure which
enables the estimation of an asset components cost.

Stage 2: Life Cost Analysis Preparation:

The Life Cost Analysis is essentially a tool, which can be used to control and manage the
ongoing costs of an asset or part thereof. It is based on the LCC Model developed and applied
during the Life Cost Planning phase with one important difference: it uses data on real costs.

The preparation of the Life Cost Analysis involves review and development of the LCC Model
as a “real-time” or actual cost control mechanism. Estimates of capital costs will be replaced
by the actual prices paid. Changes may also be required to the cost breakdown structure and
cost elements to reflect the asset components to be monitored and the level of detail required.

21
Targets are set for the operating costs and their frequency of occurrence based initially on the
estimates used in the Life Cost Planning phase. However, these targets may change with time
as more accurate data is obtained, from the actual asset operating costs or from the operating
cost of similar other asset.

Stage 3: Implementing and Monitoring:

Implementation of the Life Cost Analysis involves the continuous monitoring of the actual
performance of an asset during its operation and maintenance to identify areas in which cost
savings may be made and to provide feedback for future life cost planning activities.

For example, it may be better to replace an expensive building component with a more efficient
solution prior to the end of its useful life than to continue with a poor initial decision.

4.6 LIFE CYCLE COST CALCULATION

The formula given to calculate LCC.

22
Example for the LCC calculation.

23
5.0 PROJECT FINANCE ANALYSIS

Our project is to design one unit of multipurpose building of Food Hub Pagoh.
To build this project, we use the method by using debt and equity. Total cost for our
multipurpose building is Rm5,500,000.00 We found out that we must to get the total
money about RM6,000,000. By debt we borrowed from bank with CIMB is 30% from
our total cost of construction and CIMB will give money with interest of 6%.
Meanwhile from 70% we sell our share to public and to Bursa Saham. This is because
our company is a public company.

5.1 Debt And Equity

5.1.1 Debt

Debt is known as money raised by the company in the form of borrowed

capital. The company will owed the money toward another person or entity they
are the cheapest source of finance as their cost capital is lower than preference
shares and the cost of equity. Funs that raised through debt must be repaid after
expiry of specific term. Debt also means the terms of loan, or bonds. Loan can
be obtained from financial institution or bank. Debt can be secured or
unsecured. Secured debt needs to pledge an asset as a security if the money can’t
be paid within the time meanwhile unsecured debt is no obligation to pledge an
asset to get the funds.

5.1.2 Advantage Of Debt:

1. Control
Taking out a loan is temporary. When the debt is repaid so that the
relationship is end. The lender can’t say anything in how the owner
runs his business.
2. Taxes
Loan interest is tax deductible, whereas dividends paid to
shareholders are not
3. Predictability
The company cash flow will go easier if the principal and interest
were stated in advance. The loans can be short or in a long term.

24
 5.1.3 Disadvantage of Debt:

1. Qualification
The company and the owner must have acceptable credit ratings to
qualify.
2. Fixed payments
Principal and interest payments must be made on specified dates
without fail. Businesses that have unpredictable cash flows might
have difficulties making loan payments. Declines in sales can
create serious problems in meeting loan payment dates.
3. Cash flow
Taking on too much debt makes the business more likely to have
problems meeting loan payments if cash flow declines. Investors
will also see the company as a higher risk and be reluctant to make
additional equity investments.
4. Collateral
Lenders will typically demand that certain assets of the company
be held as collateral, and the owner is often required to guarantee
the loan personally.

5.2 Equity

Equity is the value attribute to the owners of a business. The process of

raising capital the sale of shares in the enterprise. The sale of an ownership
interest to raise funds for business is refers to the equity financing equity. Equity
financing is different from debt financing which refers to funds borrowed by a
business. difference between assets and liabilities on the company’s balance
sheet, is calculated by the book value of equity, while the market value of equty
is based on the current share or determined by investor or valuation
professionals.

25
 5.2.1 Advantages Of Equity

1. Less risk
Because don’t have any fixed monthly loan payment. This can be
very helpful when to startup any business that may not have positive
income cash flows during the early month.
2. Credit problems
If having any credit problem, equity financing is the only choice for
funds to finance growth. Even though financing is offered, the rate
of interest may be to high and the payment too steep to be acceptable.
3. Cash flow
The equity financing does not take funds out of the business but debt
loan repayments take funds out of the company's cash flow will
reducing the money needed to finance growth.
4. Long-term planning
Equity investors do not expect to receive an immediate return on
their investment.

5.2.2 Disadvantages Of Equity

1. Cost
The equity investors expected to receive a return on their money but
the business owner must be willing to share some of the company's
profit with his equity partners.
2. Loss of Control
The owner has to give up some control of his company when he takes
on additional investors. Equity partners want to have a voice in
making the decisions of the business, especially the big decisions.
3. Potential for Conflict

If the partners will not always agree when making the decision, this
conflict may erupt from different vision for the company and
disagreement on management styles.

5.3 Different Between Debt And Equity

26
 Debt Equity
Definition  Funds owed by the  Funds raised by the
company towards company by issuing
another party are shares is known as
known as Debt. Equity
Type Of Finance  Load funds  Own funds
Reflects  Obligation  Ownership
Term  Comparatively short  Long term
term
Status Of Holders  Lenders  Proprietors
Risk  Less  High
Return  Interest  Dividend
Nature Of Return  Fixed and regular  Variable and
irregular
Collateral  Essential to secure  Not required
loans, but funds can
be raised otherwise
also
Cost Reduction  Debt holders bear  They often have no
less risk, compared to recourse for their
equity holders investments if
companies fail
Profit Retention  Helps to retain more  The more profits a
profits within the company makes, the
company more it has to share
with equity investors
Financial Leverage  Helps to lower the  Dividends paid to
company’s taxes equity holders are not
because of allowable tax-deductible and
interest deductions must come from
because the lower the after-tax income.
tax incomes the less
taxes company have
to pay

27
5.4 Project Finance Analysis Calculation

RM6,000,000
DEPT (30%) = RM 1,800,000

EQUITY (70%) = RM 4,200,00

Calculation Of Dept

i = 6% , n = 3 years

𝑅𝑑 = (1 + )
𝑛
𝑖
ⁿ -1

𝑅𝑑 = (1 + 0.06
3 )³ - 1

𝑅𝑑 = 6%

28
5.5 Calculation of Equity
By using Capital Asset Pricing Model (CAPM) formula:
The Capital Asset Pricing Model (CAPM) is a model that describes the
relationship between expected return and risk of investing in a security. It shows that
the expected return on a security is equal to the risk-free return plus a risk premium,
which is based on the beta of that security. Below is an illustration of the CAPM
concept.

𝑬(𝑹) = 𝑹𝒇 + 𝜷(𝑬(𝑹𝒎 ) − 𝑹𝒇 )

Where:

E(R) = Expected return from the share

β = Correlation with the market

E(Rm) = Expected return from the market

Rf = Risk free rate

Rf = 3%, β = 2%, E(Rm ) = 10%

𝐸 (𝑅) = 𝑅𝑓 + 𝛽(𝐸 (𝑅𝑚 ) − 𝑅𝑓 )

E(R) = 3% + 2%((10%) − 3%)

E(R) = 17%

29
5.6 MARR

Debt and equity have two method which is Weighted Average Cost of Capital
(“WACC”) and Minimum Acceptable Rate of Return (“MARR”). We choose WACC
method as our future profit.

5.6.1 Definition of WACC

Weighted average cost of capital (WACC) is a calculation of a firm's

cost of capital in which each category of capital is proportionately weighted.
Common stock, preferred stock, bonds and any other long term debt are all the
sources of capital. to calculate the WACC, multiply the cost of each capital
component by its proportional weight and take the sum of the results. The
method for calculating WACC can be expressed in the following formula:

𝑬 𝑫
WACC = (𝑹𝒆 ) + ( ) (𝑹𝒅 )(𝟏 − 𝒕)
𝑫+𝑬 𝑫+𝑬

Advantage of WACC

1. Simple and easy.

2. Used for valuing a firm.
3. A criterion to accept or reject a new project.
4. Single hurdle rate for all projects.

Disadvantage of WACC

1. Difficulty in maintaining the capital structure.

2. Difficulty in acquiring current market cost of capital.
3. Important sources of capital avoided.

30
5.6.2 Calculation of WACC

𝑬 𝑫
WACC = (𝑹𝒆 ) + ( ) (𝑹𝒅 )(𝟏 − 𝒕)
𝑫+𝑬 𝑫+𝑬

𝑅𝑒 = 17% , E=70% , D= 30% , 𝑅𝑑 = 6% , t= 10%

𝐸 𝐷
WACC = (𝑅𝑒 ) + ( ) (𝑅𝑑 )(1 − 𝑡)
𝐷+𝐸 𝐷+𝐸

70% 30%
WACC = (17%) + ( ) (6%)(1 − 10%)
30%+70% 30%+70%

WACC = 24%

31
6.0 RELEVANT EXAMPLE
These illustrative financial statements have been produced by the KPMHG
international Standard Group and the views expressed herein are those of the KPMG
International Standard Group.

Figure 1: Consolidated statement of financial position.

Additional line items, heading and subtotal are presented in the statement of financial position
when relevant to an understanding of an entity’s financial position. The judgment is based on
an assesemant of:

 The nature and liquidity of the assets

 The function of assets within the entity
 The amount, nature and timing of liabilities

32
Figure 2: Consolidated statement of financial position (continued from figure 1).

Total comprehensive income is change in equity during period other than those changes
resulting from transactions with owners in their capacity as owners. Entities have a choice of
presenting all item of income and expense recognized in a period either in:

 One statement: a statement of comprehensive income

 Two statements: a separate income statement and a statement beginning with profit or
loss and displaying components of other comprehensive income

33
Figure 3: consolidated statement of comprehensive income.

34
 Figure 4: consolidated statement of comprehensive income (continued from figure 3).

Share-based payment does not address specifically how share-based payment

transaction is presented within equity. For example, whether an increase in equity in connection
with a share-based payment transaction is presented in a separate component within equity or
within retained earnings.

35
Figure 5: consolidated statement of changes in Equity.

36
Figure 6: consolidated statement of changes in Equity (continued from figure 5).

37
Figure 7: Consolidated statement of cash flow.

38
Figure 8: Consolidated statement of cash flow (continued from figure 7)

39
7.0 CONCLUSION

Our commercial building known as the high-cost of commercial building which

this project provided a triple storey of commercial building where first floor is food
court hall with 8 store and sitting area for customer.Then second floor of this building
placing the 2 store of franchies restaurant and the entertainment hall are located at the
third floor of this commercial building. Every each floor have the 3 restroom including
the toilet for disabled person. This building provided 70 parking and have the
decoration landscape arround the area of building.

Moreover, this project was invest by company arround RM 5.5 million to build
and construct this building. Initially the estimate value for 3-storey commercial building
is six million Malaysia Ringgit.After that the net future cash flows are calculated within
3 years.At the same time by follow the cash flow analysis starting one untill third year
will be the process of cost recovery period.From the time period this project will earn
the profit where the profit in third year is Rm 144,000.00 (refer to page 44).

Lastly, what we can conclude from the overall of this project, Work Breakdown
Structure (WBS) was important for initially stage to identify the every level of the
project.Then to determine the ideal cost and duration time, Cash Flow Diagram will be
applied in this project same like Life cycle cost (LCC) will be calculate to know the
potential life cycle cost saving with cumulative committed life cycle cost in acquisition
phase and operation phase

40
8.0 REFERENCE

 “Life Cycle Costing: Meaning, Characteristics and Everything Else.” Learn

Accounting: Notes, Procedures, Problems and Solutions, 18 June 2016,
www.accountingnotes.net/cost-accounting/life-cycle-costing/life-cycle-costing-
meaning-characteristics-and-everything-else/5783.
 Cimb Bank. (2018). Retrieved from Financing:
https://www.cimbislamic.com.my/en/personal/products/financing.html
 Schade, J. (2007). LIFE CYCLE COST CALCULATION MODELS FOR
BUILDINGS. Researchgate.
 Vill.Glosary. (2006). wrike. Retrieved from Project management guide:
https://www.wrike.com/project-management-guide/faq/what-is-work-breakdown-
structure-in-project-management/
 Way, J. (2018). The Advantages of Using Debt as Capital Structure. Chron.

41
9.0 ATTACHMENTS

42
10.0 APPENDIX

43
CALCULATION TO GET PROFIT

30% = RM 1,800000.00 (DEBT)

Period of Debt 3 years WITH 6% OF INTEREST

RM 1,800000.00 / 3 years = RM600000.00

RM600000.00 (value for per year)

(6/100) x RM 600000 = RM 36,000.00

RM 600,000.00 + RM36, 000.00 = RM636, 000.00 (THE VALUE THAT NEED TO

PAY TO THE BANK FOR EVERY YEAR)

RENT = RM 65,000.00 PER MONTH OR RM 780,000.00 PER YEAR

SO PROFIT

RM 780,000.00 – RM 636,000.00 = RM 144,000.00 (PROFIT)

44