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GSM 5301

ACCOUNTING FOR DECISION MAKING

ase Study

AP for ATLAM
Group Member Name

MATRIC NO.

AHMAD SHAHIR ABD AZIZ

PBS15111063

GOH YEONG SENG

PBS15111117

LEE LIHAO

PBS15111104

NG YIN YONG

PBS1511984

YAN SOOK MUN

PBS15111033

ZULFADZLI DRUS

PBS15111046

Company Background
Akademi Teknikal Laut Malaysia (ATLAM) was
established on 15 August 1981 to train and
prepare Malaysian for the maritime industry.
The academy is located in Melaka and
Terengganu, having 195 staffs by 2001 where
89 of them are in administration and 106 are
in training section.
IT infrastructure was in very poor state before
the privatization on 1 January
Obtained better IT facilities from their holding
company-PETRA Group Of Companies.

Case Summary
Before 2001, ATLAM relied on a customized singleuser system bought from vendor. The academys PC
was solely used to enter accounting entries and
cannot be used to produce financial statement.
ATLAM are set to upgrade their system into the
PETRA group-wide SAP system.
Because of the current economic crisis and the
complexity of SAP system, implementation plan have
to be made based on Its

-Tangible/Intangible aspect
-Impact on Accounting Notes
-Impact on Management and Share Holder

Tangible? Intangible?
SAP

Hardwar
e

Tangible

Softwar
e

Intangib
le

Financec and Accounts


Manager

Functional
Analyst

User
Representative

Project
Manager

User Project
Manager

Conflict between top managemen


Spend more money

Initial software license, training costs,


customisation work

Computer & Spaces

Staff capability
Less sophisticated users

Change in work

processes, culture and


habits

Elimination of Lim from proje

Initial investment for SAP in 4 years and 4 mon

2. Impact on Accounting
Notes/Balance Sheet and Net
Income
Balance Sheet

Assets

Owners

Liabilities

Income Statement

Net income

= Revenues

Expenses

equity
++Equipment

--Revenue

--Net

+Operating

--Owners
Income
Equity

+
Cost

Cont.
Implementing SAP system is all about the
benefits to ATLAM.
Investment to make the company to
operate better and bring large benefit.
The ability of SAP to generate profit and
get a good and consistent cash flows for
the company shows that SAP is belonging
to asset.

Cost-Benefit Analysis (CBA)


Cost-Benefit Analysis (CBA) estimates and
totals up the equivalent money value of the
benefits and costs to the community of
projects to establish whether they are
worthwhile.
Can be seen by using several ways
including by calculating Initial Investment,
Cash flow, Payback period, Net present
value and others.

Initial Investment
This is the investment that ATLAM has to make to introduce SAP in their accounting system .

Details
Initial Software (Including Project Expenses & PIFS
& MMM Modules)

1,000,000.00

The Hardware

2,000,000.00

Training Cost

1,271,550.00

Customization Work
Total Cost

RM

72,840.00
4,344,390.00

Cash Flow for year 1 - 6 for


PETRAs group-wide SAP system.
Cash Flow for year 1 - 6 for PETRAs group-wide SAP system.
Year
1
2
3
Accountant's
time
and

400,000
800,000
efficiency
Technical
expertise
cost
1,200,00 1,400,00
600,000
savings
0
0
Process and procedures cost

500,000
900,000
savings
1,200,00 1,500,00
Working capital savings
900,000
0
0
1,500,00 3,300,00 4,600,00
Total Savings
0
0
0
Average SAP licence cost

150,000
200,000
Cost to convert old data to new
100,000
160,000
180,000
data
Cost of overheads
300,000
420,000
490,000
Cost of system maintenance
60,000
120,000
130,000
and firewalls
Cost of hardware expansion

260,000
300,000
Cost of training

500,000

800,000

900,000

Total Costs

960,000

1,910,00
0

2,200,00
0

4
1,200,00
0
1,600,00
0
1,200,00
0
1,500,00
0
5,500,00
0
225,000

5
1,600,00
0
1,800,00
0
1,500,00
0
1,500,00
0
6,400,00
0
250,000

6
2,000,00
0
2,000,00
0
1,800,00
0
1,500,00
0
7,300,00
0
250,000

560,000

600,000

640,000

560,000

600,000

640,000

140,000

150,000

160,000

340,000
1,000,00
0
2,825,00
0

380,000
1,100,00
0
3,080,00
0

400,000
1,300,00
0
3,390,00
0

Cash Flow for year 1 - 6 for


PETRAs group-wide SAP system
Year
Total Savings
Total Costs
Earnings
before
tax
depreciation
Depreciation cost at 34%
(RM 4,344,390.00)
Earnings before tax
Suggested Tax Rate 25%
Earnings after tax
Depreciation Reversal
After-tax cash flows

1
1,500,000
960,000

2
3,300,000
1,910,000
1,390,000.
00
(246,182.1
0)
1,143,817.
90
(285,954.4
8)

3
4,600,000
2,200,000
and
2,400,000.
540,000.00
00
(246,182.1
(246,182.1
0)
0)
2,153,817.
293,817.90
9
(73,454.48
(538,454.4
)
8)
1,615,363.
220,363.42 857,863.42
42
246,182.10 246,182.10 246,182.10
1,104,045. 1,861,545.
466,545.52
52
52

4
5,500,000
2,825,000
2,675,000.
00
(246,182.1
0)
2,428,817.
9
(607,204.4
8)
1,821,613.
42
246,182.10
2,067,795.
52

5
6,400,000
3,080,000
3,320,000.
00
(246,182.1
0)
3,073,817.
9
(768,454.4
8)
2,305,363.
42
246,182.10
2,551,545.
52

6
7,300,000
3,390,000
3,910,000.
00
(246,182.1
0)
3,663,817.
9
(915,954.4
8)
2,747,863.
42
246,182.10
2,994,045.
52

Payback Period
Payback period is a method that estimates the amount
of time required for the cash flows generated by the
investment to repay the cost of the investment.
Year

Cash Flow

1
2
3
4
5
6

RM
(4,344,390.00)
466,545.52
1,104,045.52
1,861,545.52
2,067,795.52
2,551,545.52
2,994,045.52

Cumulative Cash
Flow
RM
(4,344,390.00)
(3,877,844.48)
(2,773,798.96)
(912,253.44)
1,155,542.08
3,707,087.60
6,701,133.12

Payback Period
The initial outlay is RM 4,344,390.00. Up to year 3, the accumulated
cash flow is RM 3,432,136.56 (RM 466,545.52 + RM 1,104,045.52 +
RM 1,861,545.52). Hence, it requires RM 912,253.44 which is shown
at the calculation below to cover the rest of the initial investment.
To determine the remaining period:

Payback Period

= 3 + (Balance left in year 3 / Cash flow in year

4)
= 3 + (912,253.44 / 2,067,795.52)
= 3 + 0.44
Therefore, the payback period for the implementation of SAP is 3.44
years.

Net present value (NPV)


Year
1
2
3
Net Cash
1,104,045. 1,861,545.
Inflow
466,545.52
52
52

Present
Value
0.9091
0.8264
0.7513
Factor

Present
Value of
1,398,579.
Cash
424,136.53 912,383.22
15
Flows

Total PV
of Cash
7,421,796.55

Inflows

Initial
Investme (4,344,390.0

nt
0)

Net
=3,077,406.
Present

55
Value

2,067,795.
52

2,551,545.
52

2,994,045.
52

0.6830

0.6209

0.5645

1,412,304.
34

1,584,254.
61

1,690,138.
70

Internal Rate of Return (IRR)


Internal Rate of Return is the rate of return from
the capital investment. In other words, IRR is the
discount rate that makes NPV equal to zero.
With the NPV analysis, the IRR can be compared
to a required rate of return to determine whether
the company should accept the investment.
An investment with IRR that greater than
required rate of return may be accepted while it
may be rejected if IRR less than required rate of
return.

Internal Rate of Return


(IRR)
Time

Cash Flow After


Depreciation

IRR

DR + 1

(DR + 1)^T

0.25

466,545.52

0.25

1.25

1.25

1,104,045.52

0.25

1.25

1.56

1,861,545.52

0.25

1.25

1.95

2,067,795.52

0.25

1.25

2.44

2,551,545.52

0.25

1.25

3.05

836,572.30

2,994,045.52

0.25

1.25

3.81

785,838.72

4,505,464.82

161,074.9

IRR of Cash flow


(4,344,390.00)
373,236.41
707,721.49
954,638.73
847,457.18

Internal Rate of Return


(IRR)
Time

Cash Flow After


Depreciation

IRR

DR + 1

(DR +
1)^T

0.30

466,545.52

0.30

1.30

1.30

1,104,045.52

0.30

1.30

1.69

1,861,545.52

0.30

1.30

2.20

2,067,795.52

0.30

1.30

2.86

2,551,545.52

0.30

1.30

3.71

687,748.12

2,994,045.52

0.30

1.30

4.83

619,885.20

3,888,958.34

(455,431.66)

IRR of Cash flow


(4,344,390.00)
358,881.17
653,281.37
846,157.05
723,005.43

Internal Rate of Return


(IRR)

Cont.
Based on the calculation, the after-tax cash flow
are positive within 6 years period.
From the cumulative cash flow we can see that
the cash flows is negative firstly.
But in the period of year 3 to year 4, ALTAM can
get the all the payback
That is to say, after 3 year and 4 month, the
ATLAM will begin to make profit.

Cont.
Assets

Balance Sheet
= Liabilities

Income Statement
Net income = Revenues

Owners
equity
++Owners

Expenses

++Revenue

--Operating Cost

+Net
Equity
Income

So if the using time of SAP is far more than 6 years (like 10 or more long), company
ATLAM will make more profits

Recommendation
1. Project Schedule
Why?
Time constraint in implementation of SAP
system
Suggested solution
Develop Gantt Chart

Gantt Chart

Recommendation(cont)
1. Cost and facilities
Why?
High expenses in SAP implementation cost and
equipment
Suggested solution
Negotiate with SAP management representative
(software license and customize cost)
Request funding assistant from PETRA group
Training program conduct by expert staff of PETRA
group
Request sponsorship from PETRA to purchase new
equipment

3. Staff
resistance

Communication
between employee
and management

Make promise for


employee about there
are no any position
change

4. Training and Testing


Due to the system complexity, ATLAM
should arrange some employee to the
SAP system training course.
Consult PETRA group for the system
Provide a guideline based on the
company need.
Testing period should be provided

Thank you
for your
Attention!