CAPITAL

INVESTMENT
DECISION
Table of Contents

Executive Summary……………………………………………………………..2
1.Introduction……………………………………………………………………2
2.Base Case Projection ………………………………………………………….3
Payback Period……………………………………………………………..4
Discounted Payback Period………………………………………………...4
Net Present Value…………………………………………………………..6
Internal Rate of Return……………………………………………………..6
3.Sensitivity Analysis………………………………………………………… .. 6
Scenario-1: " Higher WACC Impact " …………..……………………….6
Scenario-2: "Accelerated Sales Growth"…………………………………..7
Scenario-3: "Decrease in EBIT"…………………………………………...8
4. Conclusion and Recommendation……………………………………………9
5. References……………………………………………………………………10

1
Executive Summary:

This report presents a comprehensive evaluation of MASTEEL's 5-year expansion project,

focusing on capital investment decisions and sensitivity analyses. The analysis provides
insights into the project's financial viability under varying scenarios. The base-case projection
indicates a promising investment with positive Net Present Value (NPV), a favourable
Internal Rate of Return (IRR), and reasonable payback periods. However, sensitivity analyses
highlight the project's sensitivity to key assumptions. Scenario 1 demonstrates the potential
for enhanced financial performance with accelerated sales growth, while Scenario 2
emphasizes the importance of sales projections in shaping the project's financial success.
Scenario 3 reveals the risks associated with decreased profitability due to higher costs. Our
conclusion underscores the need for vigilant monitoring of assumptions and robust sensitivity
analyses to make informed investment decisions.

1- Introduction
Malaysia Steel Works (KL) Berhad, also known as "MASTEEL," is a well-known and well-
established steel manufacturer in Malaysia. With a rich history dating back to its foundation,
the company is dedicated to the production and distribution of high-quality steel products.
MASTEEL plays a pivotal role in the Malaysian steel industry and beyond, supplying a wide
range of steel materials to diverse sectors, including construction, infrastructure, automotive,
and manufacturing.

MASTEEL's key business activities include:

a) Steel Manufacturing: The company operates modern steel mills equipped with advanced
technology to produce an extensive range of steel products, including steel bars, wire
rods, and steel billets.
b) Steel Processing: Beyond manufacturing raw steel, MASTEEL offers steel processing
services, such as cutting, bending, and heat treatment, to customize steel products
according to customer specifications.
c) Distribution: MASTEEL maintains a well-established distribution network to ensure the
prompt and efficient delivery of steel products to customers across Malaysia and
international markets.
d) Research and Development: The company invests in ongoing research and development
initiatives to innovate and develop new steel products that meet the highest quality and
industry standards.
e) Business Segments: MASTEEL serves a diverse clientele through the following business
segments.

MASTEEL's high-quality steel products are integral to the construction industry, contributing
to the development of buildings, bridges, and other infrastructure projects. MASTEEL
consistently delivering high-quality steel products and services since its establishment. Our
business revolves around the manufacturing and distribution of steel products. The company
supplies steel materials to the automotive sector, contributing to vehicle manufacturing,
safety, and performance.
MASTEEL's steel components are essential for large-scale infrastructure projects, ensuring
the durability and longevity of critical structures. MASTEEL supports a broad spectrum of
manufacturing industries by providing steel products crucial to their production processes.
2
MASTEEL's success is underpinned by several key drivers and strategies: The company
maintains stringent quality control procedures, ensuring that its steel products consistently
meet international quality standards. MASTEEL embraces innovation in manufacturing
processes and product development to stay at the forefront of the steel industry. MASTEEL
prioritizes understanding its customers' specific requirements and offers tailored solutions to
meet their needs effectively. MASTEEL places a strong emphasis on sustainability and
environmentally friendly steel production practices, aligning with global sustainability trends
and environmental regulations. In 2022 Malaysia Steel Works (KL) Berhad successfully
installed and commissioned its new billet charging technology that eliminated the use of
fossil fuel for billet reheating at its Bukit Raja rolling mill.
MASTEEL recognizes the growth potential within the steel industry in Malaysia and the
region. The company's strategies to tap into this potential include: MASTEEL plans to invest
in expanding its manufacturing capacity to meet the rising demand for steel products in
Malaysia and neighbouring markets. The company seeks to explore export opportunities to
regional and global markets to expand its market presence. MASTEEL is actively exploring
opportunities for vertical integration into downstream industries to enhance value addition
and offer a more comprehensive range of products and services.
MASTEEL has established a strong and respected presence in the Malaysian steel industry.
The company holds a significant market share, which is a testament to its commitment to
quality, innovation, and customer satisfaction. MASTEEL continues to focus on maintaining
and strengthening its leadership position in the market while contributing to the growth and
development of the Malaysian steel industry.

The objective of the Company’s manufacturing activities is to maximize shareholders’ value

through the generation of profits by increasing sales volume and widening profit margin per
MT with the efficient utilization of minimum overheads and capitals. MASTEEL is diligently
looking towards establishing new strategic partnerships and joint ventures with other steel
mills to increase its capacities and expand into stainless and alloy steel products for its home
market and new markets in the ASEAN region. MASTEEL’s objectives are promoting the
development of the Malaysia Steel Industry to ensure that all iron and steel needs of Malaysia
are satisfied.

2- Base-case Projection
To make a capital investment decision the primary methods used for capital investment
decisions include Net Present Value (NPV), Payback Period, Discounted Payback period, and
Internal Rate of Return (IRR). To make capital investment decision I took data from audited
accounts of financial year 2022 and make necessary assumptions i.e. added back
depreciation on straight line method ignoring time value of money and tax compliance. And
corporate tax rate is 24%. WACC is 9.84% took from 3 rd party source. I have calculated and
evaluate these based on the given information. Necessary working and calculations attached
below.

3
 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Sales 1,579,691 1,816,645 2,179,974 2,615,968 2,929,884 3,281,471

Depreciable Asset - 1,737,251

Working Capital - 121,828 - 11,848 - 18,166 - 21,800 - 15,696 - 17,579
(a) - 1,859,079 - 11,848 - 18,166 - 21,800 - 15,696 - 17,579
EBIT 272,497 326,996 392,395 351,586 393,776
Add back Dep. 347,450 347,450 347,450 347,450 347,450
619,947 674,446 739,845 699,036 741,226
Tax @ 24% - 148,787 - 161,867 - 177,563 - 167,769 - 177,894
Working Capital Recovered - - - - - 206,917
Cash Inflows (b) - 471,159 512,579 562,282 531,267 770,249
Operating/Free Cash Flow (a-b) - 1,859,079 459,312 494,413 540,483 515,572 752,670

Payback Period:
The payback period of MASTEEL's expansion project, which stands at 3.71 years, is a
significant financial metric indicating the time it takes for the initial investment to be fully
recovered. This short payback period is a favorable feature of the project, suggesting
relatively low financial risk and a quicker return on investment.
The graphical representation and table below provide a summary of the project's cash flows
over the years, showing the progression of cumulative cash flows:

In simple terms, this means that MASTEEL's investment is forecasted to pay for itself within
a relatively short period, which is an encouraging sign for the project's profitability and
reduced exposure to risk. The positive cumulative cash flow at the end of the payback period
reflects the recovery of the initial investment. Consequently, MASTEEL can expect to enjoy
the fruits of its investment and generate net positive cash flows beyond the payback period,
further contributing to the project's financial success.

Discounted Payback Period:

The discounted payback period for MASTEEL's expansion project, calculated at 4.57 years,
provides a crucial perspective on the project's financial viability. This metric takes into
account the time value of money, reflecting the notion that a sum of money received in the
future is worth less than the same amount received today. A discounted payback period of
4.57 years implies the following:

4
The project's cash flows, when adjusted for the time value of money, take 4.57 years to fully
recuperate the initial investment.
This metric offers a more conservative assessment of the investment's return compared to the
non-discounted payback period. It considers the decreasing value of future cash flows.While
the non-discounted payback period was 3.71 years, indicating a quicker recovery, the
discounted payback period extends slightly due to the impact of discounting future cash
flows. This means that, in present value terms, it takes more time to cover the initial
investment.
A longer discounted payback period could be seen as a higher-risk aspect of the project,
suggesting that the return on investment takes more time to materialize in present value
terms. It's important to assess this metric in conjunction with other financial indicators to
make a comprehensive investment decision. Once the discounted cumulative cash flows turn
positive at the end of this 4.57-year period, it signifies the point when the project starts
generating a positive net return in today's monetary terms.
Overall, the discounted payback period is a valuable metric for evaluating the project's
financial dynamics, reflecting the project's return characteristics in a manner that accounts for
the time value of money.

The Graphical representation of Discounted Payback period indicating 4.57 year (when
discounted cumulative cash flows are positive) is as follows;

5
Net Present Value
The positive Net Present Value (NPV) of $201,693 for this investment project is a strong
indicator of its potential success and contribution to the organization's growth. NPV considers
the time value of money by incorporating the discount rate (cost of capital) and the
anticipated cash flows across the project's lifespan. In essence, this NPV outcome reveals that
the project's projected cash flows, when brought to their present value through the specified
cost of capital, surpass the initial investment of $1,859,079. This presents a promising
outlook for the project's fiscal well-being. Furthermore, the favorable NPV signifies that the
project is composed to yield returns greater than the expenses incurred, accounting for the
time value of money. This sets the project's financial soundness and its potential to contribute
positively to the organization's overall wealth.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) of around 13.69% holds significant financial implications.
It surpasses the Weighted Average Cost of Capital (WACC), which stands at 9.84%. This
divergence is a strong indicator that the project is anticipated to yield a rate of return greater
than the cost of capital. In practical terms, this means that the project's expected returns
exceed the company's cost of financing, making it an appealing and financially rewarding
investment. An IRR higher than the WACC underscores the project's capacity to generate
value, enhance the organization's financial position, and potentially reinforce its long-term
growth and prosperity.

3- Sensitivity Analysis
Scenario-1: "Higher WACC Impact"
In this scenario, the Weighted Average Cost of Capital (WACC) was intentionally raised to
13% from the base case rate of 9.84%. This reflects a more conservative financing
environment or a potential change in the company's cost of capital.
In this condition, the Net Present Value (NPV) of the project is $33,900, indicating that the
project remains financially sound and is capable of producing a positive return. This scenario
underscores the project's adaptability to varying financial conditions and its potential to
deliver value to the organization even in the face of increased financing costs. It also
highlights the importance of carefully monitoring and managing the company's cost of capital
to maximize project profitability. An NPV of $33,900 under this scenario indicates that, even
with a more elevated cost of capital, the project still generates a positive NPV. This implies
that the project remains financially viable and has the potential to create value for the

6
company, despite the increased cost of financing. It also suggests a degree of resilience in the
project's financial performance.
Under these financial conditions, the project demonstrates its financial efficiency by
recovering the initial investment in approximately 3.58 years for the Payback Period and 4.38
years for the Discounted Payback Period. This scenario underscores the project's ability to
adapt to a higher cost of capital while still providing a relatively swift return on investment. It
also highlights the importance of closely managing financing costs to optimize project
returns.
In this scenario, the project maintains its attractiveness with an IRR of approximately
13.69%, underscoring its resilience in generating returns that surpass the cost of capital, even
in the face of a higher discount rate. This reaffirms the project's potential to create value and
remain a financially rewarding investment. It also highlights the importance of carefully
managing the cost of capital as a key factor in optimizing project profitability and returns.
The fact that the IRR of 13.69% is still higher than the adjusted WACC of 13% indicates that
the project continues to generate a rate of return that exceeds the cost of capital in this
scenario, reinforcing its status as an attractive investment, even in the face of increased
financing costs.

Scenario-2: "Accelerated Sales Growth"

In this scenario, assumptions were adjusted to reflect a more optimistic sales growth pattern.
Sales are now expected to grow at a faster rate of 20% for the first two years, followed by a
consistent growth of 15% for the next three years. Working capital and depreciable asset
remains unchanged. This decision accelerates the project's revenue generation in the initial
years, setting the stage for improved financial performance. The positive impact of this
decision is seen across various financial metrics.
The adjustment in sales growth leads to a significant increase in the Net Present Value (NPV)
of the project, reaching $330,383. This higher NPV indicates that the project, under the new
assumptions, is expected to generate even more value for the company. The project's
estimated returns, when discounted to present value terms using the specified discount rate,
exceed the initial investment by a larger margin. This signifies improved financial
performance and attractiveness.
One of the immediate impacts of the accelerated sales growth is a reduced Payback Period.
The project is now expected to recover its initial investment in a shorter timeframe,
specifically in 3.58 years. This demonstrates the project's ability to deliver quicker returns on
investment, aligning with the company's desire for a faster capital recovery.
The Discounted Payback Period, which factors in the time value of money, also shortens
under this scenario, settling at 4.38 years. This further reinforces the project's efficiency in
recouping the initial investment, even when accounting for the opportunity cost of capital.
The Internal Rate of Return (IRR) experiences a significant improvement, reaching 15.93%.
This elevated IRR indicates that the project's returns substantially exceed the adjusted
Weighted Average Cost of Capital (WACC) of 9.84%. It underscores the project's
attractiveness and its potential to generate substantial returns, especially under the conditions
of accelerated sales growth.
In conclusion, this sensitivity analysis reveals the substantial influence of adjusting sales
growth assumptions on the project's financial performance. The cumulative impact of these
decisions results in a more financially appealing project, characterized by a notably higher
Net Present Value (NPV), quicker payback periods, and an improved Internal Rate of Return

7
(IRR). This scenario underscores the pivotal role of sales projections in shaping the project's
financial trajectory and accentuates the project's potential to make a substantial contribution
to the organization's financial success. Furthermore, it emphasizes the significance of
conducting diverse scenarios in financial analysis to comprehend the project's sensitivity to
various assumptions.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Sales 1,579,691 1,895,629 2,274,755 2,615,968 3,008,364 3,459,618

Depreciable Asset - 1,737,251

Working Capital - 121,828 - 11,848 - 18,166 - 21,800 - 15,696 - 17,579
- 1,859,079 - 11,848 - 18,166 - 21,800 - 15,696 - 17,579

EBIT 284,344 341,213 392,395 451,255 518,943

Add back Dep. 347,450 347,450 347,450 347,450 347,450
631,794 688,663 739,845 798,705 866,393
Tax @ 24% - 151,631 - 165,279 - 177,563 - 191,689 - 207,934
Working Capital
- - - - - 206,917
Recovered
- 480,164 523,384 562,282 607,015 865,375
Cash Flows - 1,859,079 468,316 505,218 540,483 591,320 847,796

Scenario-3: "Decrease in EBIT"

In this scenario, it is assumed that the project's EBIT margin decreases to 10% as a result of
increased costs associated with both the cost of sales and administrative expenses and
depreciable asset remains unchanged.
The striking outcome of this scenario is the negative Net Present Value (NPV) of -$66,621.
This implies that, under the altered assumptions, the project is not expected to create value
for the company. The estimated returns, when discounted to present value terms using the
specified discount rate, fall significantly short of covering the initial investment. The negative
NPV signals that the project may not be financially viable in this scenario.
With the decrease in EBIT, the Payback Period is extended to 4.31 years. This means that it
takes a longer time for the project to recover the initial investment. The project faces a
delayed return on investment due to reduced profitability.
The Discounted Payback Period, accounting for the time value of money, is also extended to
5.15 years. This emphasizes the project's slower ability to recoup the initial investment when
considering the opportunity cost of capital.
The Internal Rate of Return (IRR) experiences a notable decrease, falling to 8.55%. This
lower IRR suggests that the project's returns are now lower than the adjusted Weighted
Average Cost of Capital (WACC) of 9.84%. The project becomes less attractive from a
financial perspective.

This sensitivity analysis underscores the vulnerability of the project to adverse changes in
profitability. The decisions made in this scenario collectively result in a financially
challenging situation, marked by a negative NPV, extended payback periods, and a lower
IRR. It highlights the critical importance of maintaining strong profitability and cost control
in project management. The organization must carefully evaluate and monitor operational
expenses to ensure that the project remains financially viable and capable of generating value.

8
This scenario also emphasizes the necessity of considering various risk scenarios in financial
analysis to assess the project's adaptability and financial resilience under different conditions.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Sales 1,579,691 1,816,645 2,179,974 2,615,968 2,929,884 3,281,471

Depreciable Asset - 1,737,251

Working Capital - 121,828 - 11,848 - 18,166 - 21,800 - 15,696 - 17,579
- 1,859,079 - 11,848 - 18,166 - 21,800 - 15,696 - 17,579

EBIT 181,664 217,997 261,597 292,988 328,147

Add back Dep. 347,450 347,450 347,450 347,450 347,450
529,114 565,447 609,047 640,438 675,597
Tax @ 24% - 126,987 - 135,707 - 146,171 - 153,705 - 162,143
Working Capital
- - - - - 206,917
Recovered
- 402,127 429,740 462,876 486,733 720,371
Cash Flows - 1,859,079 390,279 411,574 441,076 471,037 702,791

4- Conclusion and Recommendation

The evaluation of MASTEEL's 5-year expansion project, as detailed in this report, highlights
the critical evaluation of financial analysis and strategic decision-making in the ever-
changing landscape of the market. Comprehensive assessment, encompassing both the base-
case projection and sensitivity analyses, has yielded invaluable insights into the financial
viability of the project under various scenarios. These insights, rooted in robust financial data
and analyses, are poised to serve as a guiding compass for MASTEEL's leadership, assisting
them in charting a course towards informed and strategic decisions that will undeniably shape
the organization's future.

In the context of the base-case projection, findings are encouraging, painting a picture of a
project with the potential to create substantial value for the company. The positive Net
Present Value (NPV) of $201,693, accompanied by an Internal Rate of Return (IRR) of
13.69%, and reasonable payback periods of 3.71 and 4.57 years (payback and discounted
payback, respectively), underscore the alignment of this expansion project with MASTEEL's
growth aspirations. It's a beacon of optimism, signaling the prospect of financial success and
growth.

However, the true brilliance of financial analysis emerges in the sensitivity analyses. These
scenarios illuminate the project's susceptibility to the nuanced world of critical assumptions.
In an ever-shifting market, even slight variations in these assumptions can ripple through the
financial performance of the project, underscoring the project's vulnerability to external
influences. This realization underscores the imperative for dynamic financial analysis—an
approach not just about anticipating change but harnessing it for the organization's benefit.
It's a call to arms, a reminder that in the realm of financial analysis, adaptability is the key to
not only survival but thriving in the face of change.

9
In conclusion, this evaluation of MASTEEL's expansion project underscores the pivotal role
of dynamic financial management. The project holds immense promise, and our
recommendations underscore the route to realizing that promise. We recommend continuous
and vigilant monitoring of key assumptions. Sales projections and cost management, in
particular, should remain under a constant microscope. Furthermore, we urge the practice of
regular sensitivity analyses, embedded in the organizational culture. These analyses will
serve as the strategic compass, allowing MASTEEL to navigate the tumultuous waters of
ever-changing market dynamics. Robust cost management is another linchpin of financial
success, offering both a shield and a sword to protect financial health and to seize
opportunities. The creation of comprehensive risk mitigation plans can never be
overemphasized—preparedness for an unpredictable future is our best defense. Lastly, we
recommend approaching optimism with cautious wisdom, knowing that even the brightest
projections must navigate the landscape of profitability fluctuations. As MASTEEL embarks
on its promising journey, these recommendations are not just suggestions; they are the very
bedrock of financial resilience and informed decision-making.

5- References
GuruFocus. Weighted Average Cost of Capital (WACC) for Malaysia Steel Works (KL) Bhd
Shs. https://www.gurufocus.com/term/wacc/XKLS:5098/WACC-/Malaysia-Steel-Works-KL-
Bhd-Shs
MASTEEL. Company Profile. https://www.masteel.com.my/company-profile/
MASTEEL. (2023). MASTEEL Annual Report 2022. https://www.masteel.com.my/wp-
content/uploads/2023/05/Masteel-Annual-Report-2022_compressed.pdf
Case Analysis on Capital Investment Decision……………………………………………..
C:/Users/PC/Downloads/Case_Analysis_on_Capital_Investment_Deci.pdf
ACCA F9 Study Text https://drive.google.com/file/d/1GXVfg7h03ZZEC_SDt0yqhctZta-
9gxMJ/view

10