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PUTRA BUSINESS SCHOOL / MBA

ACCOUNTING FOR DECISION MAKING (GSM5301)

CASE STUDY - SAP FOR ATLAM

Presenters:
Dr. Raimond Selke (GM05322) , Manimaran (GM05236),
Tan Wee Ser (GM 05270)

Date: 19th June 2013

WHAT CAN YOU EXPECT?

Content:

(Raimond)
Introduction ATLAM, SAP and the problems
2 Tasks/Problems:
a) Implementation of SAP yes or not?
b) Termination of Mr. Lim

(Mani)
Feasibility Analysis / Analysis of Problem
Depreciation
(Raimond)
Payback Period

(Weeser)
Net Present Value
Internal Rate of Return
(Mani)
Strategy to solve staff resistance
(Raimond, Weeser, and Mani)
Conclusion

Dr. Raimond

INTRODUCTION ATLAM AND CASE

Train and prepare the Malaysians for the Maritime Industry; (the
maritime industry's diverse workforce focuses on seafaring as well as
shore-based professionals)
App. 200 (89 admin., ca. 100 in training) staff by 2001, Melaka and
Terenganu
Privatized on Jan. 1, 1997
Vision: a leader in the maritime education and training
Mission: to provide value added learning and provide excellent service
to its clients; value added learning : a learning and development
strategy that meets both the current and future needs of an
organization
The Petra Group, through its subsidiaries, provides financial and
management support for early stage technology businesses.
(www.businessweek.com); SAP introduction to ATLAM, capacity 250
users; Petra Group uses SAP
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Dr. Raimond

SAP

SAP, System, Application, and Products


SAP AG (Aktiengesellschaft) is a German multinational
software corporation that makes enterprise software to manage
business operations and customer relations. Headquartered in
Walldorf, Baden-Wrttemberg, Germany

Dr. Raimond

ATLAM

2 accounting systems: single user system 1981-2001, used to


enter debit and credit; SAP system, linked with PETRAs system
to match with the group reporting structure
Two different perspectives: better integrate operational data,
match the group reporting system, cost constraints, impractical
to ATLAM

Dr Raimond

2 TASKS/PROBLEMS

a) Implementation of SAP yes or not?


b) Termination of Mr. Lim

to answer a) we have to look into several aspects directly


related to Accounting issues, e.g. SAPs Costs financial and
non financial costs, Feasibility Analysis, Analysis of Problem,
Payback Period, Net Present Value, and Internal Rate of Return;

to answer b) is related to Organizational Behavior, i.e. not


rational to terminate Mr. Lim, negative aspect for the
members, a loss for ATLAM once SAP is successful
implemented, seminar by an SAP expert (will be explained
later more).
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Dr Raimond

PAYBACK PERIOD

The rule: The shorter the payback period, the better the investment.

Payback period (PB) is a financial metric that answers questions like these: How long does it
take for an investment, acquisition, or action to pay for itself? Or, how long does it take for
incoming returns to cover costs? Or, put still another way: How long does it take to break even?

The shorter time period is preferred because:


- The cost funds are recovered sooner and are available again for further use.
- A shorter payback period is viewed as less risky.
Payback period represents the period by which the initial investment will be realised.
To tell a small example if the initial investment is RM 200.000 and yearly return is RM 10.000
then payback period (PBP) will be given by the formula
PBP = Initial investment/Return.
= 200.000/ 10.000
= 20 years.

Dr Raimond

PAYBACK PERIOD

Here we have to substantiate what is return.


Return means Net profit after tax and before
depreciation. The adding back of depreciation is
because it is a non cash item and does not affect
the cash inflow.

Thus if Profit before tax is RM 100.000 (after


depreciation) and tax is RM 50.000 and
depreciation is RM 20.000 then Return is given by
RM 100.000-50.000+20.000=RM 70.000.

Dr Raimond

PAYBACK PERIOD

The payback period is considered a method of analysis with serious


limitations and qualifications for its use, because it does not account
for the time value of money, risk, financing or other important
considerations, such as the opportunity cost (i.e., the choice is the
value of the best alternative forgone)
Whilst the time value of money can be rectified by applying a
weighted average cost of capital discount, it is generally agreed that
this tool for investment decisions should not be used in isolation.
Alternative measures of "return" preferred by economists are net
present value and internal rate of return.
An implicit assumption in the use of payback period is that returns to
the investment continue after the payback period.
Payback period does not specify any required comparison to other
investments or even to not making an investment.

Dr Raimond

PAYBACK PERIOD IN OUR CASE

In our case study:


PBP = Initial investment/Return.
Initial Investment/Initial Cost:
Initial Software
1.000.000 RM
Hardware 2.000.000 RM
Software License 1.000.000 RM
Training Cost 1.271.550 RM
Customization Work
72.840 RM
__________________________________________
5.344.390 RM
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Dr Raimond

PAYBACK PERIOD IN OUR CASE

First we have to calculate the cash


flows.
We look into: After Tax Cash Flow
Through Year 1 6 inflow and outflow;
Depreciation

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Dr Raimond

AFTER TAX CASH FLOW THROUGH YEAR 1 - 6


Inflow of
cash

Year 1

Accountants
time
efficiency
Technical
Cost savings

600,000

Process &
Procedures
savings

Year 2

Year 3

Year 4

Year 5

Year 6

400,000

800,000

1,200,000

1,600,000

2,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

500,000

900,000

1,200,000

1,500,000

1,800,000

Working
Capital
saving

900,000

1,200,000

1,500,000

1,500,000

1,500,000

1,500,000

Total cost
savings

1,500,00
0

3,300,000

4,600,000

5,500,000

6,400,000

7,300,000

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Dr Raimond

AFTER TAX CASH FLOW THROUGH YEAR 1 - 6


Outflow of
cash

Year 1

Average SAP
license Cost

Year 2

Year 3

Year 4

Year 5

Year 6

150,000

200,000

225,000

250,000

250,000

Cost to convert old


data to new data

100,000

160,000

180,000

560,000

600,000

640,000

Cost Of overhead

300,000

420,000

490,000

560,000

600,000

640,000

Cost of System
Maintenance and
Firewalls

60,000

120,000

130,000

140,000

150,000

160,000

260,000

300,000

340,000

380,000

400,000

Cost of hardware
Expansion
Cost of training

500,000

800,000

900,000

1,000,0
00

1,100,00
0

1,300,00
0

Total cost

960,000

1,910,00
0

2,200,00
0

2,825,0
00

3,080,00
0

3,390,00
0

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Dr Raimond

DEPRECIATION THROUGH YEAR 1 - 6


Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Depreciation
on projects

(302,848.77
)

(302,848.77
)

(302,848.77
)

(302,848.77
)

(302,848.77
)

(302,848.77)

Earning
Before Tax

237,151.23

1,087,151.2
3

2,097,151.2
3

2,372,151.2
3

3,017,151.2
3

3,607,151.23

(-) Income
Tax

(66,402.34)

(304,402.34
)

(587,202.34
)

(664,202.34
)

(844,802.34
)

(973,930.83)

Earning After
Tax

170,748.89

782,748.89

1,509,948.8
9

1,707,948.8
9

2,172,348.8
9

2,633,220.40

(+)
Depreciation
on reversal

302,848.77

302,848.77

302,848.77

302,848.77

302,848.77

302,848.77

(+) Saving
due to
Depreciation

84,797.66

84,797.66

84,797.66

84,797.66

84,797.66

84,797.66

Earning After
Tax

558,395.32

1,170,395.3
2

1,897,595.3
2

2,095,595.3
2

2,559,995.3
2

3,017,838.34

540,000.00

1,390,000.0
0

2,400,000.0
0

2,675,000.0
0

3,320,000.0
0

3,910,000.00

Positive
/Negative
Cash Flow

(5,344,390.0
0)

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Dr Raimond

PAYBACK PERIOD IN OUR CASE


Payback Period=
5.344.390RM/(540.000+1.390.000+2.400.000RM)
=3 years and 5.344.390 4.330.000 RM
= 1.014.390
= 1.014.390/2.675.000
= 0,38
= 3,38 years pack back period

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Weeser

INFORMATION GIVEN

Depreciation: 34 % for 6 years.


Internal rate of return (IRR): 25 % with
a discount rate of 10 %.
Accounting method to use:
Net Present Value (NPV)
Internal Rate of Return (IRR)

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Weeser

NET PRESENT VALUE (NPV)

The present value of net cash flows


discounted at required rate of return (cost of
capital), minus net investment of project.
Assumes that cash flows are reinvested at
firms cost of capital. (Debts, stocks, retained
earnings)
Accept if NPV >= 0 (Present value of net
cash flow >= investment required)
n

NPV
t 1

NCF
(1 k )

t
t

NINV
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Weeser

Year Cash flow

After
Discoun DR +
Depreciation t Rate
1

0 1,188,841.0
0

NPV of
Cash flow
(1,188,841.00
)

0.10

0.10

1.10

1.10

2 1,200,000.0
1,132,632.34
0

0.10

1.10

1.21

3 1,500,000.0
1,432,632.34
0

0.10

1.10

1.33

4 1,500,000.0
1,432,632.34
0

0.10

1.10

1.46

5 1,500,000.0
1,432,632.34
0

0.10

1.10

1.61

(DR +
1)^T

900,000.00 832,632.34

756,938.49
936,059.79
1,076,357.88
978,507.17
889,551.97

1,500,000.0
6 Since
the
0

0.10
1.10
NPV is positive,
this 1.77
project
can
1,432,632.34
808,683.61

be accepted.

4,257,257.9

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Weeser

INTERNAL RATE OF RETURN

The discount rate that equates the


present value of net cash flows with the
net investment.
Assumes that cash flows are reinvested
at the computed internal rate of return.
Accept if IRR >= firms cost of capital
n

IRR
t 1

NCF
(1 r )

t
t

NINV
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Weeser

Tim
After
Cash flow
e
Depreciation
0 1,188,841.
00

(DR +
IRR of Cash flow
1)^T

IRR

DR + 1

0.25

900,000.0
832,632.34
0

0.25

1.25

1.25

1,200,000.
1,132,632.34
00

0.25

1.25

1.56

1,500,000.
1,432,632.34
00

0.25

1.25

1.95

1,500,000.
1,432,632.34
00

0.25

1.25

2.44

1,500,000.
1,432,632.34
00

0.25

1.25

3.05

(1,188,841.00)
666,105.87
724,884.70
733,507.76
586,806.21
469,444.97

Since the IRR is positive, this project can


1,500,000.
0.25
1.25
3.81
be
accepted.
1,432,632.34
375,555.97
00

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Mani

ANALYSIS OF THE PROBLEM


THE MANAGEMENT OF ATLAM, A WHOLLY OWNED
ORGANIZATION OF MICT BERHAD, HAD BEEN
ASKED TO UPGRADE ITS ACCOUNTING SYSTEM
WITH PETRA GROUP SAP SYSTEM.
IN THE MEETING, THE FINANCIAL MANAGER WHICH
WAS ZULKIFLI OSMAN HAD AN ACUTE ARGUMENT
WITH THE USER REPRESENTATIVE WHICH WAS MR
LIM.
MR LIM STRONGLY DISAGREEMENT WITH SAP.
MR LIM FEELS ANOTHER ACCOUNTING SYSTEM
ACCPAC - IS MORE AFFORDALE AND COST
EFFICIENT.
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Mani

COMPARISON BETWEEN ACCPAC VS PETRAS GROUP WIDE SAP


ACCPAC - OLD SYSTEM

SAP NEW SYSTEM

FAST TRACK SOFTWARE AND READY


TO USE

IMPLEMENTATION WILL TAKE


MONTHS

READY VENDOR SUPPORT SYSTEM

IN HOUSE SUPPORT PETRA


GROUP

CLOSE RESEMBLANCE OF PETRA


CHART OF ACCOUNTS

STANDARD CHARTS OF
ACCOUNTS WITHIN PETRA
GROUP

COMPLEX SEGMENTAL REPORTING


NO PROVISION SEPARATE COST
CENTRE - REQUIRES ADDITIONAL
SOFTWARE

COST CENTRE COULD


MAINTENED SEPARATELY
ALLOW COMPLEX SEGMENTAL
REPORTING EG DIVISIONAL
P&L ,VARIANCE ANALYSIS

NO PROVISION FOR INTERGRATION


ACCOUNTING DATA WITH OTHER
PETRA UNITS.

PROVISION FOR INTERGRATION


OF DATA EG E-BILLING

SYSTEM BACK UP DONE MANUALLY

STRONG IT SUPPORT

AUDIT POINT RAISED DURING


PROCUREMENT PROCESS MIGHT NOT
BE RESOLVED

AUDIT POINT RAISED DURING


AUDIT PROCESS MIGHT
RESOLVED THRU MATERIAL

1.

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REASONS FOR MR LIMS REJECTION:1.HIGHER COST OF SAP IMPLEMENTATION.


2.SAP IS MORE SUITABLE FOR MANUFACTURING
INDUSTRY COMPARED TO EDUCATION INDUSTRY.
3.TIME CONSTRAINT.
4.LACK OF EQUIPMENT & FACILITIES.
5.STAFF RESISTANCE TO CHANGE TO NEW SYSTEM.
- CHANGE IN WORK PROCESSES.
- CULTURE EG FEAR OF LOSING JOB.
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Mani

ACCOUNTING FOR DEPRECIATION


1.STRAIGHT-LINEDEPRECIATION IS THE SIMPLEST AND MOST POPULAR METHOD.
ITS CHARGES AN EQUAL AMOUNT OF DEPRECIATION TO EACHACCOUNTINGPERIOD.

2.THE UNITS-OF-PRODUCTION DEPRECIATION METHOD ASSIGNS AN EQUAL AMOUNT OFEXPENSE TO EACH UNIT PRODUCED OR SERVICE RENDERED BY THEASSET.
3.THE SUM-OF-THE-YEARS DIGITS METHOD DETERMINES ANNUAL DEPRECIATION BY MULTIPLYING THE ASSET'S DEPRECIABLE COST BY A SERIES OF FRACTIONS BASED ON THE SUM OF THE ASSET'SUSEFUL LIFEDIGITS.
4.THE DOUBLE-DECLINING BALANCE IS A TYPE OFACCELERATED DEPRECIATIONMETHOD THAT CALCULATES A HIGHER DEPRECIATION CHARGE IN THE FIRST YEAR OF AN ASSET'S LIFE AND GRADUALLY DECREASES DEPRECIATION EXPENSE IN SUBSEQUENT YEARS.

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Weeser

INITIAL SAP INVESTMENT


COST

COST BREAKDOWN

MYR

HARDWARE COST

2,000,000

INITIAL SOFWARE LICENCE

1,000,000

TRAINING COST

1,271,550

CUSTOMIZATION WORK

72,840

INITIAL SOFTWARE

1,000,000

TOTAL COST

5,344,390

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Mani

STRAIGHT LINE METHOD


DEPRECIATION AT 34% FOR SIX YEARS.
INITIAL COST MYR 5,344,390
DEPRECIATION PER YEAR 34%/6 YEARS = 5.66% PER YEAR
STRAIGHT LINE METHOD:INITIAL COST X %DEPRECIATION PER YEAR
MYR5,344,390 X 5.666%
= MYR320,848.77

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Mani

COST BENEFIT ANALYSIS

BENEFIT-CO ST ANALYSIS (BCA) IS A TECHNIQUE FOR EVALUATING A PROJECT OR INVESTMENT BY CO MPARING THE ECO NOMIC BENEFITS WITH THE ECONO MIC CO STS OF THE ACTIVITY.
CONCLUSION :SHO ULD IMPLEMENT SAP AS ITS BENEFITS IS MORE THAN COSTS.

TOTAL SAVING > TOTAL COST

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Mani

WAY TO SOLVE STAFF RESISTANCE.

EXAMPLE:-GOPAL THE USER PROJECT MANAGER SAP WILL


CHANGE NOT ONLY THE TECHNOLOGY BUT ALSO WORK
PROCESSES.
PROVIDE SUFFICIENT INFORMATION ABOUT ACTUAL CHANGE AS
POSSIBLE.
UNDERSTAND THE FACTORS THAT CAN CONTRIBUTE TO STAFF
RESISTANCE.
GET STAFF INVOLVED TO PARTICIPATE IN MAKING THE CHANGES.
SUGGESTION: ARRANGED SEMINAR BY SAP EXPERTS

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QUESTIONS?

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THANK YOU!

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