Phân tích đánh giá hiệu quả kinh tế tài chính của dự án đầu tư xây dựng nhà máy sắt xốp bắc kạn e

THESIS
INTERNATIONAL BUSINESS
MANAGEMENT
ANALYSIS AND EVALUATION ON
EFFECTS OF “BAC KAN SOFT
IRON PRODUCTION FACTORY”
PROJECT

TABLE OF CONTENT
INTRODUCTION..................................................................................................................3
1. Name of thesis: Analysis and evaluation on effects of “Bac Kan soft iron production
factory” project...................................................................................................................4
2. Reason of choosing this thesis:.....................................................................................4
3. Targets of the research...................................................................................................4
4. The method of research.................................................................................................5
5. Database for research....................................................................................................5
6. Structure of the thesis: the thesis includes 03 chapters and the introduction as follows:
............................................................................................................................................5
Conclusion and suggestions:.............................................................................................5
1.2. Contents of the project feasibility study.....................................................................6
1.2.2. Nature and purpose of feasibility study......................................................................6
1.3. Financial-economic analysis for investment projects................................................9
1.3.1. Determination of investment capital...........................................................................9
1.3.2. Expectation of revenues and project costs.............................................................11
1.3.3. Determination of profit, loss, and cash flow of project............................................12


GRADUATION THESIS

1.4. Sensitivity analysis...................................................................................................24
CHAPTER II........................................................................................................................26

INTRODUCTION OF CONSTRUCTION INVESTMENT PROJECT “BAC KAN
SPONGE IRON FACTORY”...............................................................................................26
..........................................................................................................................................26
2.1. About the Investor....................................................................................................26
2.1.1. Overview of Material and Complete Equipment Export-Import Corporation
“Matexim”........................................................................................................................26
2.1.2. Functional Task, activity areas..................................................................................27
2.1.3. The organizational management structure................................................................27
2.1.4. Production and business characteristics of the company..........................................28
2.2. Introduction of Construction Investment Project “Bac Kan Sponge Iron Factory”.31
2.2.1. The necessity of investment......................................................................................31
2.2.2. Investment purposes:................................................................................................37
2.2.3. Research of project market.......................................................................................38
2.2.4. Capacity and product................................................................................................42
2.2.5. Technology................................................................................................................42
2.2.6. Plan and place of factory...........................................................................................44
2.2.7. Labor organization....................................................................................................46
CHAPTER III.......................................................................................................................52
ECONOMIC AND FINANCIAL BENEFIT ANALYSIS OF INVESTMENT PROJECT
OF BAC KAN SPONGE IRON FACTORY........................................................................52
3.2. Source of capital:......................................................................................................52
3.3. Production plan:.......................................................................................................52
3.5. Estimated project revenue........................................................................................57
3.9 Project scenario analysis:..........................................................................................59
CONCLUSION AND RECOMMENDATIONS..................................................................61
Reference documents...........................................................................................................62

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INTRODUCTION
Vietnam - one underdeveloped agricultural country went through two big wars which had
pushed its economy to be lagged behind economically in comparison with the world’s.
After two years of independence (30/4/1975), Vietnam jointed into the United Nations and
officially became one member in the United Nations. Due to centrally – planed economic
management model, Vietnam’s economy did not developed during a long time then always
stayed at the backward top of the world.
Recognizing this matter, until the sixth national party congress (1986) under the objective
view, our country chose economic development model in the direction of socialist republic
oriented market instead of centrally – planned economic management model. In 1995,
Vietnam participated into ASEAN and about eleven years later continued to joint in WTO
(2006), then became the 150th member of WTO.
During more last two decades, our economy has gained significant developments.
Breaking through since 2000 until now, the economy has grew at the annual average of
7,73% (source from Legatum Institute (), belonged to the leading top of
the continent. Currently, Vietnam’s economy has overcome out of the poorest country top of
the world with the income per capita of 1300$. However, it is still a great distance
compared with countries in the same region such as Income per capita in Vietnam lagged
behind about 51 years in comparison with Indonesia’s, about 95 years in comparison with
Thailand’s and 158 years in comparison with Singapore’s (According to Sai gon times on
5.4.2012)
Based on student’s opinions, in order to shorten this distance, then beside determining
proper national strategy, strict legal system not by the way of saving, but the only way for
us is investment. Only by investment, we can increase labor output, then innovate
technologies, continually take fully advantages of national sources of the country (oil,
mineral, mining, forestry, sea…) as well as create products meeting with higher and higher
demands of people in general and customer’s in particular. The investment activities must

come along with projects meanwhile for projects to be effective, then it must be objective
in the process of setting up projects, we must analyze and evaluate carefully factors
influencing on projects and especially good project management. In the scope of thesis,
student focuses on researching and evaluating an important perspective of the project
which is “effects of the project”

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1. Name of thesis: Analysis and evaluation on effects of
“Bac Kan soft iron production factory” project
2. Reason of choosing this thesis:
According to the statistics of Investment and planning Ministry, annually Vietnam has
about 20.000 companies born out but about 30% of companies going to bankrupt during
about 5 years. Especially in some first months of 2012, there have been 50.000 companies
going to bankrupt. Some companies are step by step developing so much, but beside that
there are many companies which are still staying stalled, produce moderately or go to be
ruined… why?
In addition of strategy, market, capital source, objective reasons from macro management
of the Government, one of main reasons leading to failures of those companies is that
effects of the project investment are low or loss. The development of companies and
widely country’s economy, we must be straight to say that non - investment means that
companies are going to be ruined and absolutely the economy will not develop.
We can see that the core of the investment is to gain profit and offer jobs for
employees. In order to gain profit, the research and studying works must be careful and
accurate. There are some projects which are considered as high economical effective ones,
but actually after being completed and going into operation, they face to great losses. What

is reason? In my opinion, the main reason is that the analysis of project’s effects is not
right, provided data is not accurate. In the fact that this issue happened to many real state
projects, brick production factory, concrete production factory, mining projects
Material and complete equipment Export and import corporation (MATEXIM) is one
company operating in some traditional scopes such as trading, transportation, real estate.
However, now it was supplemented with completely new one which is mining and product
manufacture from ore. This scope was carried out by iron ore exploitation and investment
projects and soft iron production factory in Bac Kan. This is one big and daring project of
the company that decides survival and business strategies in long term for the company
In the scope of the thesis, I really expect to analyze and evaluate effects of Bac Kan
soft iron production factory project under my knowledge trained in MBA course and
researching results.

3. Targets of the research
In this thesis, I took fully advantages of theories studied in MBA course, researching
documents in order to analyze and evaluate as well as research factors related to effects of

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the project, then propose solutions for the project to be more effective, limit risks for the
company

4. The method of research
4.1. Methods used as follows:
- Research case study of Matexim Company and some other projects which have been
operating in the northern area

- Make statistics and analysis on market, collect actual information, treat data and use
database of consulting services in the technical field
4.2. Offer conclusion based on the procedure: collect information – process information
– estimate price of future market – offer solutions – find the most optimal solution conclusion

5. Database for research
5.1. Use database studied in MBA course, especially project management course,
enterprise finance, strategic management
5.2. Use database from projects provided by Matexim Company, actual data from
some projects of domestic and foreign factories
5.3. Data sources from professional organizations
5.4. Data researched on Internet under verified documents

6. Structure of the thesis: the thesis includes 03 chapters
and the introduction as follows:
INTRODUCTION
CHAPTER 1: Theory base on the project investment and analysis
CHAPTER 2: introduce about Bac Kan soft iron production factory project
CHAPTER 3: Analyze and evaluate economic – financial effects of Bac Kan soft iron
production factory project

Conclusion and suggestions:
Student’s thesis is one actual project which is being invested by Matexim Company. The
research shows which key phase is leading to one effective project, which is key phase
leading to bad effective or non effective one for the investor to have more views on
project’s future. Our students expect to receive suggestions from professors of the course
and especially from Associate Professor. Dr. Tran Van Binh – the thesis instructor for the
thesis to be better and be applied successfully in the actual case.
Respectfully thanks!

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1.2. Contents of the project feasibility study
1.2.1. Feasibility Study: Is the last screening step to select the optimal project,
this stage is to confirm the investment opportunity feasible, solid, and effective or not? In
this step of study, the study content is similar to the pre-feasibility study stage, but they
differ in more detailed and accurate level. All aspects of the study are considered in the
active state, i.e. taking into account the uncertainties that can occur on the contents of the
study. Considering the solidity of the project in terms of the impact of the uncertainties, or
it may have any impact measures is to ensure effective project.

1.2.2. Nature and purpose of feasibility study
Nature of feasibility study: In terms of form, the feasibility study document is a collection
of records presenting in a detailed and systematic manner the solidity and the reality of a
business production activity and the socio-economic development in the aspects of market,
technique, finance, organization, and socio-economic management.
In our country, the feasibility study is often called as the economic-technical arguments.
The feasibility study is conducted based on the results of studies on investment
opportunities and pre-feasibility study accepted by the competent authorities. At this stage
of feasibility study, the project is drafted more carefully to ensure that all expectation and
calculation must be achieved at a high level of accuracy before submitting to planning,
financial, and banking agencies and the international financial institutions for evaluation.
Purpose of feasibility study: The feasibility study process is conducted in three stages.
The stage of investment opportunity study is aimed at removing immediately the clearly
unfeasible projections despite of being without going into details. The unfeasibility is
demonstrated by statistics and easily findable material economic information. It helps to

save time, and costs for the next studies.
The purpose of feasibility study is to consider the last time to reach accurate conclusions
about all the basics of the project through carefully calculated and detailed statistics and
techno-economic-technical schemes, schedules, and project implementation progress
before formal investment decision.
All in all, the feasibility study is one of the tools to implement economic plans of
industries, localities, and the country as a whole to turn plans into concrete actions and
bring socio-economic benefits to the country and the financial benefits to investors.

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1.2.3. Major contents of feasibility study:
The feasibility study is also known as establishment of investment projects. Major contents
of an investment project include micro-and macro-economic, technical, and management
aspects. These aspects in the projects of different industries have their own unique
characteristics. Therefore, the choice of fields for drafting technical description and project
analysis will be a relatively complete model. This model can be used as a reference when
drafting projects in other industries.
* Major concrete contents of an investment project include the following issues:
- Considering the general economic situation related to the investment project:
It can be considered that the general economic situation is the basis of the investment
project. It represents the investment scenario directly affecting the process of development
and financial economic efficiency of the investment project. The general economic
situation is mentioned in the project includes the issues as follows:
+ Natural geographical conditions (topography, climate, geology, etc.) related to selection
and implementation of the project and upholding the efficiency of the project in the future.

+ Population and labor conditions related to the demand and consumption trends and to the
labor source provided to the project.
+ Political situation, policies, and laws that affect the interest of investors.
+ Socio-economic development situation of the country and localities and the business
production development of industries and units (GDP growth rate, investment ratio on
GDP, relationship between savings and consumption, GDP/capita, rate of business return,
etc.) that affect the implementation process and the promotion of the efficiency of the
project.
+ Situation of foreign exchange (foreign exchange payment balance, foreign reserves, debt,
and debt payment situation...) especially for projects importing raw materials and
equipment.
+ Economic systems and policies, including: Structure of business system by industry,
property relation, and region to assess the level and comparative advantages of the
investment project; the policies for development, economic reforms, and restructuring in
order to assess how favorable the level of awareness, thinking innovation, and environment
for investment are.

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+ Status of national economic planning by period, level of detail, objectives, priorities, and
impact tools from which to see the difficulties, advantages, and priority that the project will
be responded to as well as the limitations which the project must comply.
+ Situation of foreign trade and other relevant institutions, such as import and export,
import and export taxes, exchange rate policy, investment rules for foreigners, balance of
trade, international balance of payments, etc. These issues are particularly important for
projects producing goods for export and import of raw materials and machinery. For

example, the inappropriate exchange rate policy (the domestic exchange rate against
foreign currencies is low) will cause that the more production is, the more export losses,
and too high export taxes will cause difficulties in competing with goods from other
countries in the overseas market. The investment rules have the effect of encouraging and
attracting foreign investment...
The facts and data to study the general economic situation of projects above can be
collected easily in almanacs, statistical reports, magazines, books, and international
economic materials.
However, small projects do not need so many macro-economic data. For large projects, it
depends on the objectives, characteristics, and scope of the effects of projects to select in
the general economic issues above the issues related to the projects for review.
For all levels of project evaluation, macro-economic issues are considered not only in the
perspective of its impact on the projects, but also the projects’ impact on the economy at
the macro perspective, such as socio-economic benefits brought by the projects and the
projects’ impact on the development of the economy and industries for economic structural
reform and foreign-affair economic development, etc.
- Market study:
Market is the decisive factor in selection of targets and scale of projects. Even in the case
of projects having signed sole contracts, it must also study the markets where sole agents
sell their products and the reputation of the sole agents on these markets.
The market study purposes are to determine:
+ The product supply-demand markets of or services of the current projects, the
development potential of this market in the future, and the economic and non-economic
factors affecting the demand for products or service.

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+ The promotional and marketing measures necessary to be able to boost the sale of
products of the projects (including pricing policies, organization, distribution, packaging,
decoration, and advertising, etc.)
+ The competitiveness of the products compared to similar products available and products
to be released in the future.

1.3. Financial-economic analysis for investment projects
1.3.1. Determination of investment capital
* Determination of investment capital needs to be done each year and on the entire project
on the basis of the progress of the plan for proposed investment. In the total investment
capital, it needs to separate groups:
- According to sources of capital: contribution or loans (short-term, medium-term and
long-term with interest rate for each source).
- According to forms of capital: (Vietnam dong, foreign currencies), in kind, or other
assets.
The total estimated investment capital of an project should be considered at each stage of
the investment process and determined in Vietnam dong, foreign currencies, in kind, or by
other assets. The total investment capital of the project includes the entire amount of
capital needed to set up and put the project into operation. This total capital is split into two
categories: Fixed capital and working capital.
- Fixed capital consists of preparation costs and initial expenses of investments in fixed
assets. These expenses are allocated to cost of products every year in the form of
depreciation.
+ Preparation cost means the costs incurred before the investment project implementation.
Preparation cost includes: costs for establishment, project study, filing, submission, initial
management (meetings, procedures, etc.), supply arrangement relation, marketing, etc.
more Preparation cost is an amount difficult to calculate accurately. We must not miss the
detailed items and the budget for those items. These costs need to be unanimously agreed
by the parties to invest.

+ Initial cost of investment in fixed assets includes the original costs of land, cost of
equipment, means of transport, and cost of technology transfer need to be certified by the
competent authorities and in accordance with the regulations of Ministry of Finance.

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- Working capital is the amount needed to be spent on certain investments in a number of
items to make it convenient for the business of the project. Working capital needs to be
determined for each year and for each specific component. Working capital of the project is
usually determined by the formula:
Working Capital = CB + AR - AP + AI
In which:
CB: Cash balance

AR: Amount of receivables

AP: Amount of payables

AI: Amount of inventory

Table of capital estimation
item

I

Year

I
I

I
II

1. Cash balance (CB)
2. Amount receivables (AR)
3. Amount payables (AP)
4. Amount of inventory (AI)
Total working capital (1 + 2 – 3 + 4)
* Determination of capital sources for the project and the ability to secure capital from
each source in terms of quantity and progress.
Table of capital structure
Total
Capital
cost

Item

capital
Construction stage

Production stage

current

(Return of

price)

capital)
Year 1
1.

(At

Year 2

--

Year 1

Year 2

--

Total

investment
2. Capital source
+ Budget
+ Equity

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+ Loan,

1.3.2. Expectation of revenues and project costs
1.3.2.1. Estimation of annual turnover of project
Expectation of annual turnover of the project helps estimate the partial results of the
project activities, and it is an important premise to predict the benefit and determine the
cash flow scale of the project in the future. Project revenue is mainly sales from the
volume of products or services created by the project and expected to supply the market
corresponding to each period during the project life cycle.
To estimate the annual revenue of the project, it needs to estimate the basic parameters of
design capacity, annual mobilization capacity, annual inventory production, and unit price
of product as well as the change of prices in the future.
Turnover = Sales volume * unit price of products
In particular, consumption in each year is determined by the formula:
Consumption

in

period

production
=

in period

period-end
-

inventories of

period-beginning
+

finished goods

inventories of
finished goods

Or calculated by the formula:
Consump
tion

in

product
=

ion in

period
period
1.3.2.2. Estimation of annual costs of project

Difference in
-

inventories of
finished products

To meet the business needs of the project and create the corresponding revenue, the project

must consume certain costs. The costs related to the production-business activities of the
project include the direct costs, administrative costs, and costs of sales.
- Direct costs: Mean the basis for pricing production and cost of goods sold and the basis
for determining profit-and-loss results in the operation years of the project. Direct
production costs include: direct cost of materials, direct costs of labor, and general
production costs.
- Management costs: Include costs of business management and administration and other
general costs associated with all activities of the project, such as salaries and allowances
for the board of directors and project management personnel, depreciation of project

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stationeries, guest reception, and a part of business management costs allocated to the
project at an appropriate rate...
- Costs of sales: Consist of costs expected to be incurred during the sale of goods or
services of the project including salaries and allowances paid to sales staff and costs of
marketing, advertising, and packaging, etc. These costs are often estimated at an
appropriate rate by revenue or costs of the project.

1.3.3. Determination of profit, loss, and cash flow of
project
1.3.3.1. Tabulation of project basic parameters
The systematic presentation of the basic financial parameters of the project helps investors
and other stakeholders visualize the context of the project, identify what information is
important to collect and review during the process of project preparation and evaluation as
a basis for making investment decisions accordingly.

The table of parameters is usually classified into five main groups: investment capital
group, financing group, revenue group, cost group, and other parameter group for the
project analyzer to easily find information.
Based on basic financial parameters, investment plans, and operational plans of the project,
the construction of financial planning tables is carried out to serve for the determination of
the value of future cash flows for the project.
The financial analysis should be carried out using Microsoft Excel software because this
software allows us to perform calculations from simple to complex. In particular, the tools
like Goalseek, Table, Scenarios, Crystal ball ... will help us to make a lot of advances in
analysis of sensitivity and simulation. In addition, Excel is retrofitted with financial
functions like IRR(), PV(), NPV(), PMT(), etc. allows us to save calculating time with high
degree of accuracy.
1.3.3.2. Construction of expected financial statements for each year of operation or
each stage of project life.
It needs to tabulate costs of production or services, revenues, profit and loss, estimation of
accounting balance, revenue and expenditure balance. The financial statements help
investors see the financial situation of the project, and it is the source of data that helps
calculation and analysis of targets reflect the financial side of the project.
1.3.3.2.1. Financial instruments used to analyze project cash flow

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Study of the basic parameters of the project is used in the stage of project identification
study, i.e. during the formation or drafting of the project when it is looking forward to
repairing the main economic and technical features of the project. This is only the general
financial analysis. The next step is to perform detailed financial analysis. This work is

usually done at the end of the feasibility study stage or during the study to evaluate the
efficiency of the project. Thus, in all cases, performance of general financial analysis
allows saving considerable time for preparation of detailed financial analysis.
To move from general financial analysis to detailed financial information analysis, the use
of financial instruments is needed. They are the tables of financial plan for the project.
- Table of investment plan
A table of investment plan shows the total investment and capital structure. Total
investment capital includes fixed capital, working capital, and interest of loan during
construction (if any). Based on this table, it will show how the progress of capital
allocation and portfolio of assets are from which to set the basis for calculating the annual
depreciation for the project. To calculate, we can tabulate by the following form:
Table of investment plan
Total
capital
Construction stage

Production stage

(At

Item

current
price)
Year 1

Year 2

--

Year 1

Year 2

--

1. Fixed capital
2. Working cap
3.

Interest

during

construction
4. Total investment
- Depreciation plan
Table of depreciation plan is based on historical cost and fixed asset's useful life. The
historical cost of fixed assets is determined based on the value that we have determined in

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the table of investment plan. Fixed asset's useful life is usually determined by the tax
conditions. For investment projects in Vietnam, determination of useful life for
depreciation of fixed assets is based on the legal time frame of determination in accordance
with current regulations of Ministry of Finance.

There are many methods for determination of depreciation value, but when analyzing
annual depreciation for fixed assets invested in the projects, it is common to apply the
straight-line depreciation method. The annual residual depreciation value in the table of
investment plan will be calculated by taking historical cost minus accumulated
depreciation and plus new investment value (if any).
Table of depreciation plan
Item

0

1

Year
2

…

n

Historical price
Depreciation in period
Accumulated depreciation
New investment
Residual value at the end of period
For investment projects having a variety of assets with different useful lives, each type of
fixed assets should be made a separate table of depreciation plan then aggregated into one
general table of depreciation plan for all types of assets. Based on this table of depreciation
plan, we will know how much the annual depreciation is and how much the remaining
undepreciated value of the assets is at the end of the project.
- Repayment plan

For an investment project, financial cash flow only refers to loans and debt repayment
while ignoring the mobilized stock capital and repayment of dividends to shareholders.
Therefore, the project financial cash flow analysis is a reasonable way to help investors
determine the date to mobilize loans and calculate financial costs by interest and
repayment of principal debt. All these are reflected via the repayment plan of the project.
Table repayment plan for principal debt and interest
Item

0

1

Year
2

…

n

Period-beginning balance

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Interest incurred in period
Repayment amount
- Principal debt due

- Interest due
Period-end balance
Debt increased
The items in the table of repayment plan for principal debt and interest shall be calculated
as follows:
(1) The debt increased reflects the time of the loans provided
(2) PeriodPeriodInterest
Repayment + Debt
end

= beginning +

incurred

-

amount in

increased

balance
balance
in period
period
(3) Interest incurred in period is defined based on the period-beginning balance
corresponding to each period time
(4) This period-beginning balance is equal to the previous period-end balance.
(5) The amount of repayment in period depends on the expected repayment plan that the
investor agree with credit institutions.
- Table of revenue estimation: Table of revenue estimation reflects the expected income

from product salability in the future operation of the project.
Table of production and revenue estimation
Item

Year 1

Production stage
Year 2
----

Year n

1. Production
+ Primary products
+ Secondary products
2. Unit price of products
+ Primary products
+ Secondary products
3. Domestic revenue
+ Primary products
+ Secondary products
4. Export revenue
5. Total revenue
- Table of cost expectation

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Table of cost expectation reflects all costs incurred during the operation of the project. The
costs are determined on the basis of consumption of inputs to produce the output level
corresponding to an annual mobilization capacity of the project and expected prices of
these inputs on the market.
Table of project cost expectation
Item

0

1

Year
2

…

n

Direct costs
- Cost of materials
- Cost of direct labor
- Costof fuel
- Costs of repair and maintenance
-…
Cost of management
Cost of sales
Total costs
There are two methods commonly used to estimate the costs of the project: the method of
percentage of sales and the method of spending by planned norm. In addition, we also have

another method which is the combination of the above two methods.
- Table project profit and loss plan
Table project profit and loss plan is built to reflect in general the expected performance in
each period (year, quarter, and month) throughout of the project's future life. In the
simplest form, table project profit and loss plan is associated with two types of general
terms: revenue and costs. Revenue reflects the completion level achieved from the project
activities (sales and service revenue). Meanwhile, costs show the level of consumed effort
(consumption of assets, costs for inputs, and financial costs) to generate corresponding
revenue. Finally, the two important results to be determined in table project profit and loss
plan are profit (EBIT and net profit) and the obligation to pay the annual corporate income
tax. In which, expected corporate income tax rate is one of the items needed to determine
upon construction of project cash flow plan.
Table project profit and loss plan
Item

0

1

Year
2

…

n

Net revenue

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Cost of goods sold (subtracted)
Gross profit
Operating costs (subtracted)
Earnings before interest tax and loans payable
(EBIT)
Interest payable
Earnings before tax (EBT)
Corporate income tax (subtracted)
Profit after
* All reasonable costs are subtracted to calculate the taxable income:
- Depreciation of fixed assets.
- Cost of raw materials, materials, fuel, energy, and goods.
- Salaries, wages, and allowances.
- Costs of scientific research, technology, innovation, improvement, health care, and
labor training.
- Costs of outsourced services.
- Payment of interest on loans for production and business.
- Extraction of reserves.
- Costs of consumption of goods and services.
- Costs of advertising, marketing, and promotion.
- Taxes, fees, charges, and land rent.
Fees deducted when calculating income subject to corporate income tax:
- Export tax.
- Input value-added tax on export goods and services.
- Special consumption tax

on domestic goods and services subject to special

consumption tax.
- Excise tax.
- Royalties.
- Agricultural land use tax, property tax, land tax.
- Land rent.
- The fees and charges actually remitted businesses to the state budget in accordance
with

the law on charges and fees.

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- Table of cash flow plan
Table of cash flow plan is a detailed presentation of all the actual revenues and
expenditures in cash from operations of business, investment, and funding of the project
with each time it arises. There are two methods of planning cash flow:
* Direct method: Net cash flow from operations of business, investment, and financing
activities of the project is determined by taking the cash inflow minus the cash outflow.
* Indirect Method: Net cash flow from business operations to be adjusted from profit to net
cash flow, and net cash flow from investment and financing activities is determined
similarly to the direct method.
Reasons to build table of cash flow plan for the project
- Expecting the future achievements of the project
- Considering the risks and how to make the project better.

1.3.3.2.2. Calculation of targets reflecting financial side of project
* Target to assess the financial strength of business
- Coefficient of equity against debt: This coefficient must be greater than or equal to 1. For
promising projects with clear obtained efficiency, and if this coefficient may be smaller
than 1, about 2/3, the project is very favorable.
- Share of equity in investment capital must be greater than or equal to 50%. For promising
projects with clear efficiency, the proportion may be 40%, and then the project is favorable.
- The ratio between current assets against current assets in debt.
- The ratio between working capital and short-term debt.
- The ratio between the total net profit and depreciation against payables due.
Among the above targets, the 3rd one is applied only to projects of operating enterprises,
while the remaining four targets are applied to all projects. The first two targets reflect the
financial resources to ensure that all projects are implemented smoothly, and the following
three targets refer to the ability to ensure payment of financial liabilities.
1.3.4. Assessment of project efficiency
- Target of net present value (Net Present Value - NPV): The net present value is the total
net profit of the whole life of the project discounted to current year at a certain discount
rate.
* Formula:

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GRADUATION THESIS

Or

In which:
Bi (Benefit) - Benefits of the project, i.e. including all things the project achieves (such as

sales, recovery fee, recovery liquidation value, etc.)
Ci (Cost) - Cost of the project, i.e. including the all things project spends (such as
investment costs, maintenance costs, repair costs, payment of tax, and interest payments,
etc.)
r - Discount rate
n - Number of years of economic activities of the project (economic life of the project)
i - Time (i = 0,1 ... n)
(1 + r ) n − 1
Where Pi = (Bi - Ci) in every year, NPV = P ×
r × (1 + r ) n
Where Pi+1 = Pi + G or P increase steadily with an amount G,

NPV =

 (1 + r ) n +1 − 1

G
×
− (n + 1)

n
r
r × (1 + r ) 


Where Pi+1 = Pi - G or P decreases steadily with an amount G

NPV =

G 

(1 + r ) n − 1 
× n −

r 
r × (1 + r ) n 

* Formula in Excel
Function NPV: NPV (rate, value1, value2, ...)
NPV of the project: Investment capital (year 0) + function NPV
In which:
rate: costs of using money or discount rate (usually banking interest rate)
value1, value2 ...: amount of money earned for each period of the project life cycle.
* Assessment of NPV target:

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- If the project has NPV greater than 0, the project is valuable financially
- If the project has a variety of plans conflicting each other, plan with the largest NPV is
most valuable financially.
- If the project plans have the same benefits, the plan having minimum present cost value,
is valuable financially.
* Advantages and disadvantages of NPV target
- Advantages: Showing the scale of interest earned by the project life.
- Disadvantages:
+ NPV depends on the discount rate used to calculate. The determination of the discount
rate is very difficult in volatile capital markets.

+ Using this criterion requires clearly determination of lines of revenue and expenditure of
the project life. This is a difficult task, not always expected.
+ This target does not reflect the using efficiency of capital.
+ This target is only used to select the projects conflicting each other in case of the same
life. If lives are different, the selection based on this target will not make sense.
- Target of present annual value (Annual Value - AV): The present annual value is the
net present value distributed evenly in the analysis period from 1 to n.
* Formula:
AV = NPV *

r(1+r)n
(1+r)n – 1

* Assessment of Target AV:
- Any project that has larger AV is valuable financially.
- In the case of the projects conflicting each other, the project that has larger AV is the most
valuable financially.
- If the projects have the same income, the project that has the smallest current annual cost
(AVC) is the most valuable financially.
* Advantages and disadvantages of Target AV:
- Advantages: Able to be compared among projects with different life with different
additional investment times.
- Disadvantages: Calculation results depend on the selected discount rate to calculate and
also it does not reflect using efficiency of capital.

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GRADUATION THESIS

- Ratio of benefit/cost (Benefit/Cost - B/C): Ratio of the present value of benefits
obtained to the present value of the cost spent
* Formula
n

∑
B/C =

i =0
n

∑
i =0

Bi

(1+ r )

i

Ci

(1+ r )

i

* Assessment of Target B/C
If the project has Target B/C greater than or equal to 1, the project is financially efficient.
In the case of the projects conflicting each other, B/C is a standard to rank under the

principle of higher ranking for projects having greater B/C.
- Internal rate of return (Internal Rate of Returns - IRR): This ratio is represented by
interest rates that if you use it to convert the currency of the project, the present value of
real income is equal to the present cost value.
* Formula

Or

In which:
Bi - income value (Benefits) in year i
Ci - cost value (Cost) in year i
n- operation time of the project
There are two main methods to calculate target IRR of the project
Interpolation method: Just select the high and low discount rate, for the two
corresponding values NPV: a negative and a positive value. Then apply the formula:

IRR = r1 + ( r2 − r1 ) ×

NPV1
NPV1 + NPV2

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GRADUATION THESIS

In which:

r1

-

discount

rate

for

value

NPV 1

>

0

r2 - discount rate for value NPV2 < 0
Geometric method: Similar to the idea of the above method, we present them on the
graph, use congruent triangles consequence (or algebraic method) to determine IRR =
r

corresponding at NPV = 0.

A

NPV1
r1
O

B

r2
I

C

r (%)

NPV2
D
Explanation: OI = IRR (discount rate r for NPV = 0)
Consider two congruent triangles: ∆ ABI and ∆ DCI, we have the equation:
AB BI
=
CD CI

⇒

AB
BI
=
⇒ BI ; OI = OB + BI
CD + AB CI + BI

* Formula in Excel
With the above analysis, the calculation of coefficient IRR is very complex. Microsoft
Excel program has a financial function used to calculate coefficient IRR. The syntax of the
function is as follows:
IRR (values)

Values is the range containing values obtained over the period, equivalent to the range of
value1, value2 in NPV function.
IRR reflects the maximum rate of interest that the project can withstand. If you have loans
with interest rates greater than IRR, the project has NPV less than zero, i.e. loss.
* Assessment:
- Projects have IRR greater than the prescribed rated limited interest rate would be feasible
financially.
- In the case of projects conflicting each other, any project with the highest IRR will be
selected for greater profitability.

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GRADUATION THESIS

- Investment recovery time:
There are two cases for calculation of recovery time. They are recovery time not based on
monetary value and recovery time based on monetary value. The trend to use the method
recovery time based on monetary value is higher because it reflects the real value of the
currency.
Formula:
Total investment
NI + depreciation

Net income + depreciation

Target of breakeven point: Breakeven point is the point of output or revenue ensuring the
investment project without losses in normal activities.
Breakeven point can be made in the level of output or revenue.

* Formula
Breakeven point calculated by the output Qn is defined as follows:
If known:
F is the total fixed cost (fixed cost) of the project
v is the variable cost (variable cost) per unit of products and services
p is the unit price of products and services
Q0 is the breakeven output
We have:

p. Q0 = v. Q0 + F

p. Q0 - v. Q0 = F
Q0 (p - v) = F
F
p–v
Breakeven point calculated by the revenue D0 is defined as follows
Q0 =

D0 = Q0 × p0 =

p×F
=
p−v

F
1−

v
p

The formula is based on the case that the production offers a type of products and services.
If the production offers a variety of products and services, it needs additional calculation of
each type of products and services.
* Assessment

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- The smaller breakeven point the project has, the smaller the possibility of loss is
- If the project has more plans, any plan with smaller breakeven point is more highly
appreciated.
In fact, projects in different sectors have different capital investment structure, thus
breakeven points are very different. Therefore, the breakeven point is only considered for
each specific project.

1.4. Sensitivity analysis
* Sensitivity analysis: An investment project often has a long life span. However, the
calculation is based on assumptions. Actually takes place not as assumed, so that the
project cannot be certain. Therefore, it needs analysis to know whether the project is
certain not when there are adverse changes compared with the initial assumptions. It is
called as project sensitivity analysis e.
As a result, the sensitivity analysis is to analyze the relationship between the unsafe input
quantities and output quantities.
* The unsafe input quantities are:
-

Interest rate calculated in the project

-

Sales of products and services

-

Unit price of products and services

-

Variable costs

-

Period of project operation ..

* The affected output quantities are:
-

Net present value (NPV)

-

Internal rate of recovery (IRR)

-

Capital recovery time with consideration of time factor of currency

-

Breakeven point ...

If the results of the analysis show that: The unfavorable change of the input quantities that
the project is still efficient, it is a certain project to be deployed. While, in the opposite
case, it must have preventive measures or deny the project.
* Sensitivity analysis steps:
-

Determining major unsafe input quantities of the project

-

Estimating likely changes in the value of these quantities

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GRADUATION THESIS

-

Determining the impact of each change to costs and benefits and calculating the
performance targets corresponding to the change.

-

Interpreting the results and their meanings.

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