MODULE 4 Part 1

Project Management and Economy- –

strategic management process by
financial portfolio
Expected Outcomes
After completing this module, you should be able to describe: the financial
portfolio use during strategic management process
 Strategic Management Process
• There is two types of strategic management process and its
decision making
– Financial portfolio
– Non financial portfolio

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 Strategic Management Process – financial portfolio

• Selection Criteria Example: Google buy Motorola

– Financial: USD? (2013), Lenovo buy Motorola
USD? (2015), facebook buy
• payback, ROI whatsapp USD16 bil?
• net present value (NPV)
• breakeven

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 Strategic Management Process – financial portfolio
• The Payback Model/ ROI
– Measures the time the project will take to recover the project investment.
– Uses more desirable shorter paybacks.
– Emphasizes cash flows, a key factor in business.

• Limitations of Payback:
– Ignores the time value of money.
– Assumes cash inflows for the investment period (and not beyond).
– Does not consider profitability.

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 Strategic Management Process - Financial portfolio (cont’d)
• The Net Present Value (NPV) model
– Uses management’s minimum desired rate-of-return (discount rate)
to compute the present value of all net cash inflows.
• Positive NPV: project meets minimum desired rate of return and is eligible
for further consideration.
• Negative NPV: project is rejected.

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 Example 1
• Example: PROTON’s marketing department sees an opportunity of automotive sector sale base on
upgrading its sedan (PERSONA and SAGA) and mpv (EXORA) segment. The upgrading including
facelift of its body and structure, enabling GPS system, traction control, hybrid system and extra
electronic control for stability and comfort. They targeted to increase the market sales in Malaysia
towards 21% market share in 4 years’ time by selling both segment.
• Both segments require an initial investment (sedan RM3.9 billion and mpv RM3.2 billion) which
including market survey, R&D cost, supplier development, assembly and manufacturing and
assembly stages, testing etc. The marketing department convince the PROTON’s board of director
(BOD) about the projected sales and expenditure based on following figure (Table 1).
Unit Price Initial Expected Revenue Revenue Revenue Revenue
(RM) investmen annual / 1st year / 2nd year / 3rd year / 4th year
t (RM) sales cash flow cash flow cash flow cash flow
(unit) (RM) (RM) (RM) (RM)
Sedan 55000 3.9 billion 24000 1320 1320 1320 1320
million million million million
MPV 72000 3.2 billion 18000 1296 1296 1296 1296
million million million million

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 Example (Continue)
• BOD requires a projected analysis in 4 years’ time before
making any decision. One of their main concern is rate of
return 15% which quite tricky during today’s economic
condition. Assist them by preparing financial model base on
payback (payback period and Return of Investment (ROI)) and
Net Present Value (NPV) in 4 years’ time calculation. Then, give
your opinion about both projects.

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 Solution – payback/ ROI
• Payback sedan with investment 3.9 billion, annual
cash flow 1.32 billion,
• Payback period = investment/ revenue = 3900 Unit Price Initial Expected Revenue Revenue Revenue Revenue
million / 1320 million = 2.95 years (RM) investmen annual / 1st year / 2nd year / 3rd year / 4th year
t (RM) sales cash flow cash flow cash flow cash flow
• ROI = revenue/ investment = 1320 million / 3900 (unit) (RM) (RM) (RM) (RM)
Sedan 55000 3.9 billion 24000 1320 1320 1320 1320
million = 33.8% and, million million million million
MPV 72000 3.2 billion 18000 1296 1296 1296 1296
million million million million

• Paybackmpv with investment 3.2 billion, annual

cash flow 1.296 billion,
• Payback period = investment/ revenue = 3200
million / 1296 million = 2.47 years
• ROI = revenue/ investment = 1296 million / 3200
million = 40.5%

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 Solution - NPV

Period of Initial
Net cash flow time investment
• NPVsedan = Rate of return

1320 1320 1320 1320

• + + + + (-3900)
1+0.15 1 1+0.15 2 1+0.15 3 1+0.15 4
• NPVsedan = (1147.82 + 998.11 + 867.92 + 754.71) + (-3900)
• NPVsedan = 3786.56+(-3900)
• NPVsedan = -131.44
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 Net cash flow
Solution - NPV Period of
time
1296 1296 1296 1296
• NPVmpv = + + + + (-3200) Initial
1+0.15 1 1+0.15 2 1+0.15 3 1+0.15 4 investment
Rate of return

• NPVmpv = (1126.96 + 979.96 + 852.14 + 740.99) + (-3200)

• NPVmpv = 3700.05 + (-3200)
• NPVmpv = +500.05
• Accept mpv based on NPV +ve calculation. Sedan development is
secondary priority

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 Example 2
• SAMSUNG Electronics is enjoying much profit with the evolution of their flagship mobile product,
knowingly as Galaxy S9, Note 9, as similar since 2014 due to their flawless and high-end specification.
Their market gripped from Asia Pacific across Southern Asia and widening towards Europe and North
America (at one time exceeding 30% global market which equivalent to 15-25 billion USD revenue in
2015).
• However not everybody looks for SAMSUNG as his or her chosen gadget, and he or she reacted to
seeing alternatives. Most of SAMSUNG’s competitor either had to reduce their price (One Plus Three,
MOTOROLA, Xiaomi, as similar) or proposing product uniqueness (customized attachment –
MOTOROLA, efficient processor – IPHONE, better camera – HUAWEI, stock Android -NEXUS) to
compete and offered a choice for the public requirement. Unfortunately, all of the said
manufacturers is operated and own as a foreign investor.
• To counter this situation, Malaysia had invited a lot of engineers (electronic, mechanical, material,
system, as similar) to develop our gadget technology (under Untilwhen2 Sdn. Bhd.) which can
compete with the competitive market. As one of the mechanical engineers, there was eagerness to
that challenge and worked as a team to achieve the goal.
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 Example 2 (continue)
• Assist them by preparing financial model base on payback (payback period and
Return on Investment (ROI)) and Net Present Value (NPV) in 3 years’ time
calculation with 12% rate of return. Then, give an opinion about both projects.
Unit Price (RM) Initial investment Expected annual Revenue/ 1st- Revenue/ 2nd- Revenue/ 3rd-
(RM) sales (unit) year cash flow year cash flow year cash flow
(RM) (RM) (RM)

Johny type – 1500 0.48 billion 1,200,000 1.8 billion 1.8 billion 1.8 billion
• Android 9.0.1 Pie, 5.7” LED screen, 528 PPI pixel
density, corning gorilla glass 4, 2.1 GHz Octa-core CPU,
128 Gb storage and 6 GB internal RAM, 16MP with f/1.9
camera (OIS), 3500 mAh battery (fast charge)
Salim type – 2400 0.7 billion 800,000 1.92 billion 1.92 billion 1.92 billion
• Android 9.0.1 Pie , 6.2” AMOLED screen, 528 PPI pixel
density, corning gorilla glass 4, 2.4 GHz Octa-core CPU,
256 storage and 8 GB internal RAM, 16 MP with f/1.7
camera (OIS), 5000 mAh battery (fast charge)

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 Solution – payback/ ROI / NPV
• Answer
•
• Payback Johny with investment 0.4 billion, annual cash flow 1.8 billion,
• Payback ROI = 1.8 billion / 0.4 billion = 450%
• Period = 0.4 billion / 1.8 billion = 0.22 years
• Net cash flow Period of
• NPVJohny = time
1800 1800 1800 Initial
• + + + + (-480)
1+0.12 1 1+0.12 2 1+0.12 3 investment
• NPVJohny = (_____ + _____ + _____ + _____) + (-480)
• NPVJohny = 3843 Rate of return
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 Solution – payback/ ROI / NPV
• Paybacksalim with investment 0.7 billion, annual cash flow 1.92 billion,
• Payback ROI = 1.92 billion / 0.7 billion = 274 %
• period = 0.7 billion / 1.92 billion = 0.36 years Period of
Net cash flow
• time

1920 1920 1920 Initial

• NPVsalim = + + + + (-700) investment
1+0.12 1 1+0.12 2 1+0.12 3
• NPVsalim = (_____ + _____ + _____ + ______) + (-700)
• NPVsalim = +3911 Rate of return
•
• Accept ________ based on higher NPV +ve calculation. Reject ______ development

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 assignment
Table 4: New sedan model introduced by P3 Group
P3 John P3 Joni P3 Jonathan
(B segment) (C segment) (D segment)
Price: RM 50k Price: RM 80k Price: RM 105k
Main Specification: DOHC, Main Specification: DOHC, Main Specification: DOHC,
liquid cooled 1500cc (turbo), liquid cooled 1800cc (turbo), 2000 – 2400cc (turbo), 185HP
135HP (5000 rpm), 6 speed 165HP (5000 rpm), 6 speed (5000 rpm), 6 speed

Assist them by preparing each project’s;

•financial model base on payback (payback period and Return on Investment (ROI))
•Net Present Value (NPV) in 4 years’ time calculation.
•Then, give your opinion about all projects regarding which project is the best one. Then arrange the project priority

Table 5: Projected sales and expenditure based on marketing research

* M = million in RM

Unit Initial Yearly Revenue @ Revenue Revenue Revenue @

investmen expenses for yearly cash @ yearly @ yearly yearly cash
t (RM) operation, flow (RM) cash flow cash flow flow (RM)
maintenanc (RM) (RM)
e etc. (RM)
P3 John 600M 150 315M 315M 315M 315M
P3 Joni 720M 165 350M 350M 350M 350M

P3 Jonathan 820M 180 400M 400M 400M 400M

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• Break even

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 Break even

Cost classification:
Fixed – constant, unchanged – rent,
machinery, building
Variable – depend on level of
activity, the higher the unit – more
expenses

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Break even
• From that relation we may understand
the profit and lost region which is;
– Breakeven : total revenue = total cost (point
of which we are just getting by)
– Profit region : total revenue > total cost (we
are making money)
– Loss region: total revenue < total cost (we
are going into debt!)
– The formula for BEP;
• Total Sales x volume,y = Contribution @ Fixed
cost + (Variable cost x volume,y)
• Total Sales price x volume,y = Total cost
• (Total Sales price)y = FC + (VC)y

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 Break even

• Example 2.1
– Your company manufacturers a product and has a fixed cost of RM6000. The
product was selling for RM3 each at a variable cost of RM1.
– What is the breakeven volume of the product?
– If your company plans to sell 3600 units, how would you assess the ‘margin of
safety’?
– What factors could affect the calculation of the breakeven volume?

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 Break even

Solution
• FC = RM6000, TS = RM3, VC = RM1 #TS = Total sales price
• TS x volume,y = FC + (VC x y)
• (TS – VC)y = FC
• Y = FC / (TS-VC)
• Y = RM6000 / RM(3 – 1)
• Y = 3000 units
• Then the margin of safety = 3600 – 3000 = 600 units
Factors contribute towards breakeven calculation is sales price. If the sales price is
higher, the breakeven will be decrease and so forth.

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 Break even

• Example 2.3
– To boost the company profit, your company decided to sell automotive part at
‘Jom Heboh’ carnival. Spare part A can be purchased at RM2.00 with the privilege
of returning all unsold unit. The rental of the stand at the carnival is RM400.00,
payable in advance. Product A will be sold at Rm2.50 each.
– How many product A must be sold to breakeven?
– How many product A must be sold to yield a profit of RM500.00?

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 Break even

Solution
• TS x y = FC + (VC x y)
• (TS – VC)y = FC
• Y = FC/ (TS – VC)
• Y = RM400 / RM(2.50 – 2.00)
• Y = 800 unit

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 Break even

• To achieve RM500.00 profit,

• TS x y = FC + (VC x y) + Profit
• (TS – VC)y = FC + Profit
• Y = FC + Profit / (TS – VC)
• Y = RM(400 + 500) / RM(2.50 – 2.00)
• Y = 1800 unit

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• Example 2.3
• Your management requires you, as an engineer, to consider two products with the
following unit prices, fixed cost and variable cost.
• What is the breakeven point for each product in unit?
• Compute the profits of each product if sales in units are 10% above the breakeven
point?
• What product would fare better if sales dropped to 5000 units? Justify the reason.
• Which business would fare better if the market collapsed and the price per unit fell
to RM2.50? Why?
Spare part – intake Selling price per unit Variable cost per unit Fixed cost of
type (RM) (RM) operation per year
(RM)
Intake manifold 5.00 1.00 25000.00
Carburetor 5.00 3.00 12500.00

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• Solutions
• ⸫ FC = RM25000, Sales = RM5.00, Variable Cost = RM1.00 (intake
manifold)
• TC(y) = FC + VC(y)
𝐹𝐶 𝑅𝑀25000
• Y (TC – VC) = FC, 𝑦 = = = 6250 𝑢𝑛𝑖𝑡
𝑇𝐶−𝑉𝐶 𝑅𝑀5.00−𝑅𝑀1.00
• ⸫ FC = RM12500, Sales = RM5.00, Variable Cost = RM3.00 (carburetor)
• TC(y) = FC + VC(y)
𝐹𝐶 𝑅𝑀12500
• Y (TC – VC) = FC, 𝑦 = = = 6250 𝑢𝑛𝑖𝑡
𝑇𝐶−𝑉𝐶 𝑅𝑀5.00−𝑅𝑀3.00

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• If sales increase by 10%, = 6250 unit x 110% = 6875 unit
• TC(y) = FC + VC(y) + profit
•
For intake manifold, profit = (TC – VC) y – FC For carburetor, profit = (TC – VC) y – FC

= (RM5 - 1) (6875 unit) – RM25000 = [(RM5 -3) (6875 unit) – RM12500

= RM2500 = RM1250

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• If the sales dropped to 5000 units,
• TC(y) = FC + VC(y) + profit
For intake manifold, profit = (TC – VC) y – FC For carburetor, profit = (TC – VC) y – FC

= (RM5 - 1) (5000 unit) - RM25000 = [(RM5 - 3) (5000 unit) – RM12500

= - RM5000 (losses) = - RM2500 (losses).

Sales of carburetor losses less than intake

manifold.

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• If the price per unit plummet to RM2.50,
• TC(y) = FC + VC(y) + profit
For intake manifold, profit = (TC – VC) y – FC For carburetor, profit = (TC – VC) y – FC

= (RM2.50 – 1.00) (6250 unit) - RM25000 = [(RM2.50 – 3.00) (6250 unit) – RM12500

= - RM15625 (losses) = - RM15625 (losses)

Both make a loss if the sales price plummet.

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 Break even

• Summary
– Classification of cost will determine the pattern of break even /
engineering cost
– Utilizing financial portfolio method help quantitative analysis for a
better decisions

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 assignment
Table 4: New sedan model introduced by P3 Group
P3 John P3 Joni P3 Jonathan
(B segment) (C segment) (D segment)
Price: RM 50k (TC) Price: RM 80k Price: RM 105k
Main Specification: DOHC, Main Specification: DOHC, Main Specification: DOHC,
liquid cooled 1500cc (turbo), liquid cooled 1800cc (turbo), 2000 – 2400cc (turbo), 185HP
135HP (5000 rpm), 6 speed 165HP (5000 rpm), 6 speed (5000 rpm), 6 speed

Assist them by preparing each project’s;

•Break even calculation
Table 5: Projected sales and expenditure based on marketing research
* M = million in RM

Unit Initial Variable Total Sales Revenue @ Revenue Revenue Revenue @

investme cost VC yearly cash @ yearly @ yearly yearly cash
cost TC unit per
nt (RM) (RM) flow (RM) cash flow cash flow flow (RM)
(RM) year
(RM) (RM)

P3 John 600M 30k 50k 6300 315M 315M 315M 315M

P3 Joni 720M 45k 350M 350M 350M 350M
80k 4375
P3 Jonathan 820M 75k 105k 3809 400M 400M 400M 400M

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