Module

PROJECT APPRAISAL
Lecturer: Phạm Thu Vân – Faculty of Investment
M: 0942578139
E : [email protected]
 Course grading

 Attendance: 10%
 Middle-term test: 20%
 Presentation (Group work): 20%
 End-term test: 50%
Textbooks

1. Tiffin, R. (2014). Practical techniques for effective project

investment appraisal. Hawksmere plc
2. Rogers, M. and Duffy, A. (2012) Engineering Project Appraisal,
2nd Edition, Wiley-Blackwell.
 References

1. Law 61/2020/QH14 on Investment

2. Law 39/2019/QH14 on Public Investment
3. Law No. 50/2014/QH13 on the construction
4. Law No. 21/2017/QH14 dated November 14, 2017 on planning
5. Circular 34/2020/TT-BTC fees and charges in construction and
collection submission thereof
6. Decree No. 15/2021/ND-CP detailing on management of construction
investment projects
7. ...
 SYLLABUS

1 OVERVIEW OF DEVELOPMENTAL INVESTMENT AND INVESTMENT PROJECT

2 OVERVIEW OF PROJECT APPRAISAL

ORGANIZING PROJECT ASSESSMENT

3
4 PROJECT’S INVESTOR APPRAISAL

5 LEGAL APPRAISAL AND MARKET APPRAISAL

6 TECHNICAL APPRAISAL AND HRM APPRAISAL

7 FINANCIAL APPRAISAL

8 SOCIO-ECONOMIC APPRAISAL
 CHAPTER 1
OVERVIEW OF DEVELOPMENTAL INVESTMENT
AND INVESTMENT PROJECTS

1. Developmental investment

1.1. The concept of developmental investment

1.2. Characteristics of developmental investment

2. Investment projects

2.1. What is the project?

2.2. Project classification

2.3. Characteristics of the project

2.4. Project cycle

 WHAT IS INVESTMENT?

 the act of putting money or effort into something to make

a profit or achieve a result
 the act of putting money into
a business to buy new stock, machines, etc., or
a sum of money that is invested in a business in this way
 the act of buying shares, bonds, property, etc. in order to make
a profit
(Cambridge dictionary)
 WHAT IS INVESTMENT?

Investment is the process of using resources in the

present to carry out activity/activities in order to
THE
CONCEPT obtain results, to achieve certain goals in the
future.
 INVESTMENT CLASSIFICATION

1. Debt-based investments can be further broken down into

two sub-categories – public and non-public (private)
investments.
2. Equity investments can also be categorized as public and
non-public investments. The latter is commonly known
as Private Equity, which is considered a high risk, high reward
investment. In fact, equity investments are generally seen as
riskier than debt investments, with the advantage of potentially
generating higher returns.

3. Hybrid investments (convertible securities, mezzanine

capital, preferred shares)
 INVESTMENT CLASSIFICATION

1. Current Investments – Current Investments are

investments which by their nature are readily realizable and
are intended to be held for less than a year from the date when
such investment is done.
2. Long-Term Investments – Long-term investments are
investments other than the current investments, even though
they might be freely marketable.
 INVESTMENT CLASSIFICATION

1. Public investment: means the Government’s program and

project on socio-economic infrastructural construction and socio-
economic development

2. Private investment: non-public investment

INVESTMENT CLASSIFICATION

DIRECT INVESTMENT

INDIRECT INVESTMENT
 INVESTMENT CLASSIFICATION

1. Direct investment means a form of investment whereby the

investor invests its invested capital and participates in the
management of the investment activity.
2. Indirect investment means a form of investment through the
purchase of shares, share certificates, other valuable papers or a
securities investment fund and through other intermediary
financial institutions and whereby the investor does not participate
directly in the management of the investment activity.

(Law on investment 2020)

 DIRECT INVESTMENT

TRANSFERRING In order to change owner account, does

not get any gain in products or services
INVESTMENT

In order to maintain and create new

DEVELOPMENTAL
capacity in production, business, services
INVESTMENT
and daily life of society
DEVELOPMENTAL INVESTMENT

We define developmental
investing as that which
provides investors with
both commercial returns
and tangible social and
developmental impact. In
South Africa, the primary
development focus is
around the provision of
basic services and
infrastructure
development.
 CHARACTERISTIC OF DEVELOPMENTAL INVESTMENT

Resources mobilized for infrastructure investment are large and stagnate

during the investment implementation process

Pắc Pó -> Cà Mau: 3167 km

14b/km
44.168b VND
 CHARACTERISTIC OF DEVELOPMENTAL INVESTMENT

The return on investment usually take place over a long period of time.

Hồ Chí Minh Trail Dung Quat oil-extracting

factory
Meeting 6/QH11
-Resolution 07/1997/QH10
- Phase 1: 2004-2007
- 1998 - 2010
- Phase 2: 2007-2010

- Phase 3: 2010 - 2020

 CHARACTERISTIC OF DEVELOPMENTAL INVESTMENT

Risk: Risk may relate to loss of capital, delay in repayment of capital,

nonpayment of interest, or variability of returns.
- The risk of an investment is determined by the investment’s maturity
period, repayment capacity, nature of return commitment, and so on.
- The longer the maturity period, greater is the risk
- The lower the payment capacity, higher is the risk
- Risk also varies with nature of the return commitment. Ownership
commitment such as investment in equity shares carry a higher risk
compared to lender commitments such as investments in debentures and
bonds
- Higher the risk, higher is the expected return
 ROLE OF DEVELOPMENTAL INVESTMENT

Macro
economics
Sửa chữa, thay mới, cải thiện công nghệ sản
Impact xuất...
Promote Enhance Impact on
economic economic scientific and aggregate
growth structure technological supply and
aggregate
capacity
demand of
the economy
 ROLE OF DEVELOPMENTAL INVESTMENT

Creating infrastructure, new products, new services

Micro
economics
Repair, replace, improve production technology...

Expand production, purchase new equipment..

 THẨM ĐỊNH DỰ ÁN ĐẦU TƯ

WHAT IS INVESTMENT PROJECTS

An investment project is a detailed proposal of an expenditure of

liquid resources, with the objective of taking actions that will lead
to future profits.
- An investment project is made before the investment itself.
- An investment implies an expenditure of resources, but it
doesn’t necessarily mean that those resources are our own
resources: a lot of investments are carried out by
borrowing money.
- Investment project VS Operation
 KEY ELEMENTS TO DEFINE A PROJECT

1.A single definable purpose, end-item or result. This is usually

specified in terms of cost, schedule and performance requirements.
2.Every project is unique. It requires the doing of something
different, something that was not done previously. Even in what are
often called “routine” projects such as home construction, the
variables such as terrain, access, zoning laws, labour market,
public services and local utilities make each project different. A
project is a one-time, once-off activity, never to be repeated exactly
the same way again.
 KEY ELEMENTS TO DEFINE A PROJECT

3. Projects are temporary activities. A project is an ad hoc

organization of staff, material, equipment and facilities that is put
together to accomplish a goal. This goal is within a specific time-frame.
Once the goal is achieved, the organization created for it is disbanded or
sometimes it is reconstituted to begin work on a new goal (project).
4. Projects cut across organizational lines. Projects always cut across
the regular organizational lines and structures within a firm. They do this
because the project needs to draw from the skills and the talents of
multiple professions and departments within the firm and sometimes
even from other organizations. The complexity of advanced technology
often leads to additional project difficulties, as they create task
interdependencies that may introduce new and unique problems.
 KEY ELEMENTS TO DEFINE A PROJECT

5. Projects involve unfamiliarity. Because a project differs from what was

previously done, it also involves unfamiliarity. And oft time a project also
encompasses new technology and, for the organization/firm undertaking the
project, these bring into play significant elements of uncertainty and risk.
6. The organization usually has something at stake when undertaking a
project. The unique project “activity” may call for special scrutiny or effort
because failure would jeopardize the organization/firm or its goals.
7. A project is the process of working to achieve a goal. During the process,
projects pass through several distinct phases, which form and are called the
project life cycle. The tasks, people, organizations, and other resources will
change as the project moves from one phase to the next. The organizational
structure and the resource expenditures build with each succeeding phase;
peak; and then decline as the project nears completion.
 PROJECT CLASSIFICATION

1. Public project: includes funds derived from the State

budget, government bonds, local government bonds, official
development assistance (briefly called ODA), overseas
concessional loans, government credits for investment and
development purposes, retained revenues of the state budget
that have not been recorded in the state budget balance and
other loans secured by the local budget for public investment
purposes.
2. Private project: when the capital comes from private
investors or private companies.
 PROJECT CLASSIFICATION

Group 5 Group 4 Group 3 Group 2 Group 1

10.000 billion National important project

Group A project 2.300 billion

1.500 billion
1000 billion
800 billion
120 billion
Group B project 80 billion
60 billion
45 billion

Group C project

(Law on Public Investment 2019)

 PROJECT CLASSIFICATION

Construction projects Non-construction

projects

new construction, renovation, asset procurement; receipt of

upgradation and expansion of the disposition of land use right;
existing investment and purchase, repair and
construction projects, upgradation of equipment and
including the procurement of machinery; and other projects
assets, devices and equipment that are not subject to
regulations specified at
construction projects
(Law on Public Investment 2019)
 PROJECT CLASSIFICATION

- According to the kind of good or services it will provide:

Goods
•Industrial
•Agricultural
•Forestry
•Fishing
Services
•Transport
•Commerce
•Communications
•Finance
•Health
 PROJECT CLASSIFICATION

According to the city According to economic region

❖ Ha Noi
❖ Ho Chi Minh
❖ Da Nang
❖ ……..
PROJECT CYCLE
PROJECT LIFE CYCLE PHASES

1a. Conception phase

1b. Definition phase
Initiation phase or selection of a phase
2. Planning and organizing
3. Implementation
4. Project clean-up phase/Closure phase
 Ways to create new product
development through brainstorming
Kodak – informal sessions – engineer and designer with customer’s
problems and needs
- Allow time off: scouting time – for technical people to putter in
their own, pet projects
- Survey your customers
- Use iterative models: customers group discussing problems –
technical people in another room listening and solving
- Set up an idea vault
- Interaction between technical people and supplier – through visits
 During brainstorming activity:
management has to be:
 Receptive
 Vision for future growth
 Keep long term objectives in mind
 Swot
Perform preliminary project analysis to assess whether a project
proposal is worthwhile or not
Documents like: project/product documents (characteristics of project),
feasibility document (constrains), project concept document (what,
how, why – is to be done), project charter (it formally communicates
the initiation of the project, scope, authority, KSF)
 Ex: reduce vehicular pollution in your city
1.
2.
3.
….
N
Criteria for screening ideas
Effectiveness to achieve objectives
Cost of proposal
Ease of implementation
Time needed
Project implementation

 Organization of project team and allocation of work

 Monitoring – cost, value and time
 Effective control action to minimize time and cost overruns
 Updating of project schedules (time and cost)
 Provisioning of financial and other resources needed in the
project
 Coordination
 Awarding of contracts – vendors, sub contractor
 Procure and erecting of equipment and services.
Project completion and review

 Disbanding project team

 Handing over
 Accounting and report writing
 Learning for experience
 What else???
1

CHAPTER II

OVERVIEW OF PROJECT
APPRAISAL
 PROJECT APPRAISAL
2

- Project appraisal means evaluation of project from

different angles to verify the feasibility of the
business idea.

- Appraisal of the project is generally undertaken by

the FI’s before accepting the proposal of project for
financing
 PROJECT APPRAISAL
3

Definition

- “Project appraisal” as a cost and benefit analysis of

different aspects of proposed venture with an object to
adjust its viability.
 ASPECTS OF PROJECT APPRAISAL
4

- Investor feasibility
- Legal feasibility
- Market feasibility
- Technical feasibility
- Managerial feasibility
- Financial feasibility
- Social feasibility
- Ecological feasibility
 Market feasibility
5
Market appraisal: customer (who-needs), market share,
current and future competitors – their market share,
aggregate demand, possible pricing opstions.
A, Existing demand and supply position for the product
and the likely share of proposed venture in the market
B, Marketing strategy to be adopted to promote the
product
C, Cost of marketing
D, Selection of distribution channel
 Technical appraisal:
engineering aspects,
location, size, process,
etc.
6
 Technical feasibility
7

A, Description of the plant and machinery used

B, location of the site, facilities available there
C, infrastructure facilities like transport and
communication, water, power, banking etc.
D, requirement of labour ie skilled and unskilled and
their availability in the local areas
E, proximity to the market and facilities of marketing
available
 Managerial feasibility
8

A Project is also evaluated from the angle of its

management. Persons who are in charge of its
management and organization must have the talent
and experience to manage the venture
FI’s will verify the background of the persons in
charge of its management. Factors like family
background, knowledge, talent, training and
experience are all considered
9 Financial appraisal
Cost of project
Product price and pricing strategy
Cost of the product and method of financing
Project balance sheet for next 5-10 years
Cash flow and fund flow statements
BEP
Net present worth
IRR
Risk
10

Ecological: Environmental damage (air, water,

noise), restoration measures
Economics and social???
 Social feasibility
11

Every business has social responsibility. Along with

making adequate profits, the firms have to give back
something to the society in the way of..
- Generation of employment opportunities
- Development of backward region
- Encouragement to SSI
- Contribution towards public health, education and
other developmental activities.
 Ecological feasibility
12

Every business is going to create ecological

imbalance. Use of natural resources, land, water and
other factors are going to environmental damage.
Ecological feasibility analysis is made to ensure that
the damage is minimum. Projects which are eco-
friendly and those which cause minimum
environmental damage are preferred by the FI’s
13

Economic: Impact of project on society. Benefits and

costs, distribution of income in society, level of saving and
investments, employment, etc..
Production factors: time to complete project, availability
of resources, flexibility of operations, connection with
existing production line, energy requirements and its
sources, expected quality of product
Personal factors:???
Legal factors???
 Economic feasibility
14
This can be presented through:
a, Profit projections for the next 5-10 years by
presenting the projected P&L A/C
B, Break even point (BEP) sales in terms of quantity
and amount
C, Expected return on investment and assets (ROI and
ROA)
D, Estimated cost of production, sales and income for
the next 5-10 years
15 Key factors influencing investment
decisions
16 Investment criteria
17 Non-financial factors
18 Risk and uncertainty
 www.khoadautu.neu.edu.vn

CHAPTER 3: ORGANIZING PROJECT APPRAISAL

3.1. Project appraisal basis documents

3.2. Forms of project appraisal organizing

3.3. Project appraisal authority

3.4. Dossier for appraisal of investment projects

3.5. Time of appraisal projects

3.6. Appraisal project fee

PROJECT APPRAISAL BASIS DOCUMENTS

Project
profile

Legal
basis

Investigation
information
and
experience
Forms of project appraisal
organizing 1 Project appraisal council

1
Specialized agency/department
2 2 for appraisal
3

3 Advisory
 APPRAISAL COUNCIL
 Appraisal Council is a council set up by a competent agency or organization
to consider, evaluate and give written opinions for professional advice on a
particular issue before the project is approved.
 Project appraisal council is a form of appraisal organization in which the
heads of agencies and organizations competent to decide on investment
establish a project appraisal council.
 The project appraisal council can be established at the central level (the State
appraisal council), at the local level (the provincial appraisal council) or at
the appraisal council set up by agencies and organizations. .
 Appraisal Council is set up consisting of experts from ministries,
departments, related departments, together to review and evaluate all aspects
of the project or just an important content of the project in a thorough way to
help make investment decisions correctly.
 APPRAISAL COUNCIL

 Advantages of the project appraisal council

– The project appraisal council is a collection of experts with professional
knowledge and understanding of the project
– The contents of the project are evaluated in a complete, detailed and
comprehensive way

* Disadvantages of the project appraisal council

- Long appraisal time
– Expensive appraisal cost
– Many conflicts arise during the appraisal process
 State Appraisal council

 The State Appraisal Council established by decision of the Prime Minister for
each project has the task of organizing the appraisal of important national
projects (pre-feasibility study report or feasibility study report) to submit to the
National Assembly for decision or approval the investment policy, or report to
the Prime Minister for investment decision.
 The State Appraisal Council consists of the Chairman of the Council, the Vice
Chairman of the Council and other members of the Council. The Chairman of the
State Appraisal Council is the Minister of Planning and Investment; The Vice
Chairman and other members of the Council are representatives of leading
ministries, branches and relevant agencies decided by the Prime Minister at the
proposal of the Ministry of Planning and Investment.
 Specialized agency/department for appraisal

 This is a form of appraisal organizing in which the person who has

responsibility of deciding on investment will use a specialized agency with
the function of investment appraisal or the agency managing investment
activities of his/her unit to conduct the appraisal.
 These specialized agencies can be departments, specialized appraisal
departments in Ministries, Departments, People's Committees at all levels or
in companies.
 Specialized agency/department for appraisal

 Advantages:
• Project appraisal is specialized.
• Appraisal activities are implemented quickly when needed

 Disadvantages
• Appraisal conclusions can be pressured and dominated by upper
management.
 Advisory

 Advisory is a form of appraisal organization in which the person who has

responsibility of deciding on investment will select professional
consulting organizations to appraise an aspect of the project.
 Advisory means a domestic, foreign organization or individual or a
domestic and foreign joint venture (hereinafter referred to as verification
consultant or consultant) hired by the State Appraisal Council to perform
some parts of the content of national important project appraisal.
 Advisory
 Advantages
- Highly specialized due diligence
- The appraisal results have relatively high accuracy due to the selection
of consultants who are knowledgeable about the investment field of the
project.
- Reasonable appraisal costs for choosing a suitable consultant

 Disadvantages: In the case of inappropriate selection of consulting

organizations, it may lead to inaccurate appraisal results.
 Authority to decide on investment policies on projects

PUBLIC INVESTMENT PROJECTS OTHER PROJECTS

The National Assembly The National Assembly

The Government The Prime Minister
The Prime Minister
The People’s Councils
Heads of ministries and central agencies

The People’s Councils

The People’s Committee
 The National Assembly has the authority to decide on investment policies on
National important project.
 The Government has the authority to decide on investment policies on target
programs financed by funds derived from the State budget, government bonds,
local authority bonds, ODA, overseas 10 concessional loans, the government
credit for investment and development purposes, state budget revenues retained
but not recorded in the state budget balance.
 The Prime Minister has the authority to decide on investment policies on public
investment programs and projects below:
a) Group-A projects;
b) Projects financed by funds derived from the state budget, managed by the Central
Committee of the Vietnam Fatherland Front, socio-economic organizations and other
competent agencies.
c) Emergency projects financed by the state budget;
d) Projects financed by funds derived from ODA and overseas concessional loans,
- Heads of ministries and central agencies have the authority to decide on investment
policies on the following projects:
Group-B and Group-C projects financed by investment funds derived from the State
budget, government bonds, local authority bonds, ODA, overseas concessional loans, the
government credit for investment and development purposes, state budget revenues
b) Projects financed by funds derived from ODA and overseas concessional loans under
their administration
- The People’s Councils at all administrative levels have the authority to decide on
investment policies on public investment programs and projects below:
Group-B projects and Group-C priority projects under their administration. Group-C
priority projects located in local areas shall be decided by provincial People’s Councils in
alignment with objectives, developmental orientation, financial competence and particular
characteristics of these areas.
- The People’s Committee at all administrative levels has the authority to decide on
investment policies under their administration
 Dossier for appraisal of a public investment projects without
construction components
na/ A written proposal for appraisal specifying the necessity of investment in the
project; objectives and principal contents of the feasibility study report of the
project; proposal for competent authorities to decide on the project;
nb/ The feasibility study report of the project

nc/ The reports of the Vietnam Fatherland Front Committees at all levels

summarizing opinions of residents in the place where the project is to be

implemented;
nd/ Other relevant documents serving the appraisal of public investment

programs and projects.

 Dossier for appraisal of other investment projects

Proposal for project implementation

Documents proving the investor's legal status

Project proposal
Dossier

Documents proving the financial capacity of the investor

Documents proving land use right

Explanation of the project's use of technology

BCC contract (for investment projects in the form of BCC)

 Time of decision on investment policy on projects

The time of decision on investment policy on a program or project, counting from the
date an authority competent to decide on investment policy receives a complete and
valid dossier, is prescribed as follows:

a/ For national important projects: 30 days at most;

b/ For group-A projects: 30 days at most;

c/ For group-B and group-C projects: 20 days at most.

 Time of appraisal projects

The time of appraisal of public investment programs and projects without construction
components, counting from the date the appraisal agency receives a complete and valid
dossier, is prescribed as follows:

a/ For national important projects: 90 days;

b/ For group-A projects: 40 days;
c/ For group-B projects: 30 days;
d/ For group-C projects: 20 days.
 Time of appraisal projects of banks

Jobs Time of decision

Credit profile review 15 days

Collateral property appraisal 5 days

Re-appraisal 5 days

Credit department ‘s manager checking 3 days

Approval decision of the credit committee 5 days

Approval decision of the credit board 10 days

Check and handle loans Once 3 months

 PROJECT APPRAISAL FEE

a. Case 1: The total approved investment amount matches the value in the
fee schedule
Construction
Total approved
investment
= investment x Rate
project appraisal
capital
fee
b. The total approved investment does not match the value stated in the fee
schedule. The level of revenue is determined by the formula :

Nib - Nia
Nit = Nib - { ---------------- x ( Git - Gib ) }
Gia - Gib
 + Nit is the appraisal fee for the ith project group according to the scale of the value to be
calculated (unit: %).
 + Git is the value of the ith project group that needs to be charged for investment appraisal (unit:
work value).
 + Gia is the scale of the marginal value above the value to be charged for appraisal (calculation
unit: work value).
 + Gib is the scale of the value below the scale of the value to be charged for appraisal (calculation
unit: work value).
 + Nia is the appraisal fee for the ith project group corresponding to Gia (unit: %).
 + Nib is the appraisal fee for the ith project group corresponding to Gib (unit: %).

* Note: Fees for appraisal of construction investment projects must not exceed 150,000,000
VND/project.
 www.khoadautu.neu.edu.vn

INVESTMENT PROJECT APPRAISAL FEES SCHEDULE

(Circular 209/2016/TT-BTC)

Total <15 25 50 100 200 500 1.000 2.000 5.000 ≥10.000

investment
(billion VND)

Rate % 0,0190 0,0170 0,0150 0,0125 0,0100 0,0075 0,0047 0,0025 0,0020 0,0010
 www.khoadautu.neu.edu.vn

INVESTMENT PROJECT APPRAISAL FEES SCHEDULE

(Circular 209/2016/TT-BTC)

1. Fee = 50.000.000.000 x 0.015/100 = 7.500.000 VNĐ

2. Rate = 0,01 – (0.01 – 0.0075)/(500 – 200) x (250 – 200) = 0.0096 %

Fee = 250 b VND x 0.0096% = 24 tr

3. Rate = 0.0075 – (0.0075 – 0.0047)/ (1000 – 500) x (570 -500) = 0.0071%

Fee = 570 b VND x 0.0071% = 40,5 tr

Nib - Nia
Nit = Nib - { ---------------- x ( Git - Gib ) }
Gia - Gib
 CHAPTER 4
INVESTOR APPRAISAL

4.1. Basis of assessment

4.2. Assessment of the legal status of investors

4.3. Assessment of business capacity

4.4. Assessment of management capacity

4.5. Financial analysis

 BASIS OF ASSESSMENT PURPOSE

1 Investor's legal profile

Verify the
legal
2 Audited financial statements status
and
capacity
of the
3 Investor survey information
investor
ASSESSMENT OF THE LEGAL STATUS OF INVESTORS

ASSESSMENT OF LEGAL ASSESSMENT OF

STATUS SUITABLE OF SECTORS

• “legal documents” of an individual • Assess the suitability of the investor's

include the ID card (old or new business sectors line with the
format), passport and other legal project's investment field
personal identification documents.
• “legal documents” of an enterprise
include the Establishment Decision,
Certificate of Enterprise Registration
and equivalent documents.
 Documents retention
 a) The charter, internal rules and regulations; the
member/partner/shareholder register;
 b) The certificate of Industrial property rights; the certificate of
registration of product/service quality; other licenses and certificates;
 c) Documents proving the enterprise’s ownership of its assets;
 d) Votes, vote counting records, records of meetings of the Board of
Members/Partners, General Meeting of Shareholders, Board of Directors;
the enterprise’s decisions;
 dd) The prospectus for offering or listing securities;
 e) Reports of the Board of Controllers, verdicts of inspecting authorities
and audit organizations;
 g) Accounting books, accounting records and annual financial statements.
 ASSESSMENT OF BUSINESS CAPACITY

CONTENT 1 History of formation & development

1 Business sectors of the investor

2
2

3 3 The company's points

Add Title
4
4 Advantages and disadvantages of
5 the company
5
5 Company's reputation in the market
ASSESSMENT OF THE MANAGEMENT CAPACITY OF THE BOARD

1 Personal history, family background

2 Education and professional qualifications

3 Manager capacity

4 Knowledge of business law

5 Working experience

6 Reputation

7 Business ethic
 FINANCIAL ANALYSIS
INCOME STATEMENT / PROFIT &LOSS

Revenue

(COGS)
Gross Profit
(Overheads)
Operating Profit
(Finance Costs)
Profit before tax
(Taxation)
Profit after TAX
Vertical analysis
Horizontal analysis
❖ Growth
- Increase in sales/revenues
❖ Profitability/Performance Ratio
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
Gross Profit % = x 100 (%)
𝑆𝑎𝑙𝑒𝑠

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
Operating Profit % = x 100 (%)
𝑆𝑎𝑙𝑒𝑠

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

Net Profit % = x 100 (%)
𝑆𝑎𝑙𝑒𝑠

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

Return on Equity % = x 100 (%)
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑓𝑢𝑛𝑑𝑠

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
Return on Capital employed % = x 100 (%)
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑓𝑢𝑛𝑑𝑠+𝐿𝑜𝑛𝑔𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡
  BALANCE SHEET

Fixed assets Shareholders funds

Long-term liabilities
Current Assets Current liabilities

The balance sheet metrics can be divided into several

categories, including liquidity, leverage, and operational
efficiency
 Liquidity ratio:
How easily a company can pay its debt. Paying the amounts that are due,
when they are due – to avoid credit.
𝐿𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
Quick ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑙𝑖𝑙𝑖𝑡𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
Current ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑙𝑖𝑙𝑖𝑡𝑒𝑠

Net working capital = Current assets – current liabilities

 Solvency/Leverage ratio:

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
- Gearing % = x 100 (%)
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑓𝑢𝑛𝑑𝑠
𝐴𝑠𝑠𝑒𝑡𝑠 −𝐸𝑞𝑢𝑖𝑡𝑦
- Debt ratio =
𝐴𝑠𝑠𝑒𝑡𝑠

Lower the debt ratio, the safer the company is

 Efficiency
𝑃𝑟𝑜𝑓𝑖 𝑡𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
- Return on Assets % = x 100 (%)
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝐷𝑒𝑏𝑡𝑜𝑟𝑠+𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 −𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
- Working capital % = x 100 (%)
𝑆𝑎𝑙𝑒𝑠/𝑅𝐸𝑣𝑒𝑛𝑢𝑒
 CASH FLOW STATEMENT
Rates of return and profitability analysis

 The key insights to be derived from the pyramid of ratios include:

• Return on equity ratio (ROE)
• Profitability, efficiency, and leverage ratios
• Primary, secondary, and tertiary ratios
• Dupont analysis
 www.khoadautu.neu.edu.vn

CHƯƠNG V
LEGAL APPRAISAL AND MARKET APPRAISAL

4.1. Legal appraisal

4.2. Market appraisal

 www.khoadautu.neu.edu.vn

LEGAL APPRAISAL

Purpose Base documents

Verify the legal compliance of Socio-economic development
the project with the planning and planning, sectors and investment
regulations of the State areas
Legal document system related
to the project
Legal profile of the project
 www.khoadautu.neu.edu.vn

Appraisal of the conformity of the project with the

socio-economic development planning, sector
development planning, construction planning
LEGAL APPRAISAL

Appraise the project's conformity with the State's

legal documents, regulations and preferential
regimes.

Assessment of land use, resources, and site

clearance capabilities.

Assessment of competent agencies on

environmental impacts, fire prevention plans
 www.khoadautu.neu.edu.vn

MARKET APPRAISAL

• Verify the feasibility and market certainty of the

Purpose project.

• Investigation information from the market

• Information and data forecasting, predicting market
Base fluctuations, prices, competitors, substitute products
documents
• Product capabilities and prospects
 www.khoadautu.neu.edu.vn

MARKET APPRAISAL

Consider
Evaluate
Check the Forecast of product the ability
reasonable Assess the market promotion to compete
supply and options, and
ness in conformity
consumptio
determinin of the demand for dominate
n methods
g the target project's the and the market
market of products project's product for the
products. distribution project's
the project.
networks
products
Market and Demand Appraisal

 Market and demand appraisal is the managing of the demand – its

estimation and determining the extent to which it can be met with
satisfaction to consumers and profit to the producers.
 In simple words, whenever a project is appraised, it begins with two aspects
of demand
 That is, what is the potential size of the market? And to what extent the
project appraisal is getting share of the market?
The study of present demand requires
the following aspects:
 Current purchases
 Not satisfied demand
 Marketing facilities
 Competition
Steps in market and demand appraisal

 Market and demand appraisal is very important for the success of the
future project, so it is very essential that it should be carried out in an orderly
and systematic manner
 Situational analysis as well as specification of objectives: The project
analyst, may be entrepreneur himself, is expected to get relationship
between a given product and its market presently available
 In this regard, the analyst may get good deal of facts relating to customer
preferences, purchasing power of customers, and the quantity they buy,
where they buy, when they buy, and even why they buy?
Steps in Market and Demand Appraisal

 Such informal analysis sometimes generates enough data to measure the

market and to find out the projected demand and revenues
 If such an analysis seems to be reliable and enough and if time and cost
considerations are there, sometimes an analysis can decide not to carry on
a formal study
 However, in most circumstances, a formal study is considered essential
 Objectives will help in generating the information relevant in forecasting
the overall market demand and in assessing the projected future share of
the market
Collection of market data

 In order to answer the questions which are listed above, information may
be obtained from two sources such as primary and secondary sources
 Secondary information provides the base and the starting point for market
and demand analysis
 It indicates what is known and provides ways and hint for gathering
information required for further analysis. Sources of collecting data include
both internal and external sources.
Steps in Market and Demand Appraisal

Major sources of information are primary and secondary data

- Primary data: Primary data can be defined as information that is collected
first hand, generally, by original research tailor made to answer specific,
current research questions
- Secondary data: Secondary data is that data the information of which is
collected for some other purpose, and is thus, readily available
Steps in Market and Demand Appraisal

 The important sources of secondary information used for market and

demand analysis in Vietnam as follows:
- Census of VN issued by Govt. of VN
- National sample survey reports issued by cabinet secretaries and Govt. of
VN
- Plan report issued by planning commission
- Annual publication by central statistical organization
- VN year book by minister of information and broadcasting
- Statistic year book issued by UNO
- Economic survey issued by ministry of finance
Steps in Market and Demand Appraisal

 Conduct of market survey: When secondary data are not available,

irrelevant or obsolete, the analyst must then turn to primary research
 Market survey can be census or sample survey. In census survey approach,
the entire population or the universe is covered
 For ex, we took the case of estimating demand and market share for the
improved kitchen flour mill
 Instead, sample survey can be resorted all the firms concerned. Each
technique has its own merits and limitations.
Steps in Market and Demand Appraisal

 The information sought in a market survey relates to one or more of the

following aspects:
- Total demand and the growth rate of demand
- Demand in different segment of the market
- Income and price elasticity of demand
- Objectives of buying
- Buying plan and intentions
- Satisfaction with the existing products unsatisfied needs
Steps in Market and Demand Appraisal

 Following are the steps which are involved in conducting sample survey:
- Define the target population: Defining the target population is of almost
importance in clear and carefully studied manner as it is first step
- Select the sampling technique and size: Sampling technique implies the
type of sampling i.e. simple random sampling, cluster sampling, sequential
sampling, stratified sampling, systematic sampling and so on
- Design the questionnaire: To collect the information from the respondents,
the main instrument is questionnaire
Steps in Market and Demand Appraisal

 Following are the steps which are involved in conducting sample survey:
- Recruitment and training of researchers: proper plan of recruitment and
training is to be prepared and implemented
- Get information according to questionnaire from the target respondents:
the respondents can be interviewed personally, or through mail or
telephone.
- Scrutiny of information: Next step is to scrutinize the gathered information so
that irrelevant or inconsistent data can be eliminated
- Analysis and interpret the information: The collected information has no
meaning unless it is minutely analyzed and interpreted with due care
Characterization
of the market
Characterization of the market

 What can a person do after sample survey

- We can talk about nature of market
 Market characterization – Assessment of market qualitatively
- Understand how the market functions
- One can talk about:
+ Effective demand in the past and present
+ Price
+ Methods of distribution and sales promotion
+ Consumers
+ Supply and competition
+ Government policy
Demand
Forecasting
Techniques
Methods of Demand Forecasting

Qualitative methods: judgment of experts to translate qualitative information

into quantitative estimates. These qualitative methods are:
Time Series Projection Methods

 These methods generate forecasts on the basis of an analysis of the

historical time series
 The important time series projection methods are:
- Trend projection – method
- Exponential smoothing method
- Moving average method
Causal methods

 Causal (fundamental) methods –

Develop forecasts on the basis of cause-effect relationships in a quantitative
manner
The important causal methods are:
- Chain ratio method
- Consumption level method
- End use method
- Leading indicator method
- Econometric method
Uncertainties in Demand Forecasting

 Demand forecasts are subject to error and uncertainty which arise from
three principal sources:
 Data about past and present market
 Methods of forecasting
 Environmental change
 www.khoadautu.neu.edu.vn

CHAPTER VI
TECHNICAL APPRAISAL AND HRM APPRAISAL

6.1. Technical appraisal

6.2. HRM appraisal

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TECHNICAL APPRAISAL

• Verify the feasibility of technical solutions given in the

Purpose project

• Technical and economic standards and norms prescribed

for the investment field of the project

Base • Requirements on equipment and technology of the

document project
s
• Investigation and survey information
 OUTLINE
 Manufacturing process/technology
 Technical arrangements
 Materials and inputs
 Product mix
 Plant capacity
 Location and use
 Machineries and equipments
 Structures and civil works
 Environmental aspects
 Projects charts and layouts
 Project implementation schedule
 Need for considering alternative
 Manufacturing process/technology
For manufacturing a product/service often 2 or more alternative technologies are
available (Steel – Bessemer process or open hearth, Cement – Dry or wet, Soap –
semi or fully boiled process)
• Choice of technology
The choice of technology is influenced by a variety of considerations:
- Plant capacity (relationship b/w capacity and technology???)
- Principal inputs (quality of limestone- dry or wet process)
- Investment outlay and production cost (effect of alternative technologies on these
two should be observed)
- Use by other units (how it is yielding profits)
- Product mix
- Latest developments (obsolescence should be minimized)
- Ease of absorption (high end tech may take long time and trained people)
 Develop or by or
Technology transfer: Movement of innovation, techniques,
knowledge, from org to org or country to country by assistant,
investment, licensing or franchise (complete know how or part),
trade or training.
Four stages of technology transfer

 Adoption : Modification by supplier before transfer to buyer as

per his requirements
 Adaption: Modification by buyer to make suitable for himself
 Absorption: Unpacking technology by buyer to upgrade
 Diffusion: Applying technology for other applications
Greenfield project: Develop or transfer technology??
Growth stage: Develop or transfer technology??
Product life cycle is getting squeeze: Develop or transfer
technology???
Sources of technology development

R&D
Cooperative R&D
Contract research – educational institute and pharma
Technical arrangements

Satisfactory arrangements must be made to obtain the technical

know-how needed for the proposed manufacturing process. When
collaboration is sought, inter alia, the following aspects of the
agreement must be worked out in detail.
- The nature of support to be provided by the collaborators during
the designing of the project, selection and procurement of
equipment, installation and erection of the plant, operation and
maintenance of the plant, and training of project personnel
- Process and performance guarantees in terms of plant capacity,
product quality and consumption of raw materials and utilities.
 The price of technology in terms of one time licensing fee and
periodic royalty fee
 The continuing benefit of research and development work being
done by the collaborator
 The period of collaboration agreement
 The assistance to be provided and the restrictions to be imposed
by the collaborator with respect to exports
 If the technical collaboration is backed by financial collaboration,
the level of equity participation and the manner of sharing
management control
 Assignment of the agreement by either side in case of change of
ownership
 Termination of the agreement or other remedies when either
party fails to meet its obligation.
 Material inputs and utilities
An important aspect of technical analysis is concerned with defining
the materials and utilities required, specifying their properties in
some detail, and setting up their supply programme
Materials and utilities may be classified into four broad categories:
- Raw materials (Agricultural products, mineral products, livestock
or forest products, and marine products)
- Processed industrial materials and components (parts,
component, sub-assemblies)
- Auxiliary materials and factory supplies (chemicals, packing
matl, oils, grease, paint, varnishes)
- Utilities (power, water, steam, fuel)
 Plant capacity
 Plan capacity (also referred to as production capacity) refers to the
volume or number of units that can be manufactured during a given
period. Plant capacity may be defined in two ways: feasible normal
capacity and nominal maximum capacity (installed capacity)
 Several factors have a bearing on the capacity decision:
 Investment cost (the investment cost per unit of capacity decreases as
the plant capacity increases)
C2 = C1 (Q2/Q1)^α
Where: C2 is derived cost for Q2 units, C1 is the known cost for Q1 units
of capacity, and α is factor reflecting capacity – cost relationship
Ex: For 5000 units, the investment is $1,000,000. What would be the
investment for 10,000 units. Given α = 0.6
Plant capacity

 Technological requirement (cement plant – capacity of 300 tones

per day – rotary kiln method, otherwise use vertical shaft method
for lower capacity)
 Input constraints (power supply, raw material/labor availability,
etc)
 Market conditions: If favorable, then higher capacity of plant
 Resources of the firm: Managerial and financial limit the capacity
decision
 Governmental policy
Location and site

Location refers to a broad area, site refers to a specific piece of land.

The choice of location is influenced by a variety of considerations:
- Proximity to raw materials and markets
- Availability of infrastructure
- Labor situation
- Government policies
- Other factors (climate conditions, general living conditions,
proximity to ancillary, ease in coping up with pollution)
 Structures and civil works

 Structures and civil works may be divided into three categories:

- Site preparation and development (leveling, gardening, removal of
existing structures, relocation of existing pipelines, cables, power
lines, roads, reclamation of swamp, and draining and removal of
standing water, connection of electric power, water, communication)
- Buildings and structures (Factory building, stores, warehouse,
laboratory, administrative building, staff welfare building, cafeteria,
medical, etc)
- Outdoor works (Handling and treatment of emission, wastages,
effluents, transportation and traffic signals, out door lighting,
boundary wall, fencing, gates, security posts)
 Project charts and plant layout
Once data is available on the principal dimensions (market size, plant
capacity, production technology, building and civil works, ect…) of the
project, project charts and layout may be prepared
The important charts and layout drawings are:
- General functional layout
- Material flow diagrams,
- Production line diagram
- Transport layout
- Utility consumption points layout
- Communication layout
- Organizational layout
- Plant layout
Plant layout

The important considerations in preparing the plant layout are:

 Consistency with production technology
- Smooth flow of goods from one stage to another
- Proper utilization of space
- Scope for expansion
- Minimisation of production cost
- Safety of personnel
Schedule of project implementation

As part of technical analysis, a project implementation schedule is

also usually prepared, For preparing the project implementation
schedule the following information is required:
- List of all possible activities from project planning to
commencement of production
- The sequence in which various activities have to be performed
- The time required for performing various activities
- The resources normally required for performing various activities
- The implications of putting more resources or less resources than
are normally required
The need for considering alternatives

There are alternative ways of transforming an idea into a concrete

project. These alternatives may differ in one or more of the
following aspects:
- Nature of project
- Production process
- Product quality
- Scale of operation and time phasing
- Location
Project team
building,
conflict and
negotiation
 Effective project teams should have

 Clear Sense of Mission: Understanding of objectives

 Productive Interdependency: degree of joint activity among team
members required to complete project (MIS, Engg, A/c, marketing,
admin – give importance to interrelatedness of each others’ efforts)
 Cohesiveness: Degree of mutual attraction that team members hold for
each other and their task
 Trust: Tam’s comfort level with each individual member. How to build
trust – PM – “what happens here stay here” (divulging of views and
confidence betrayed). It takes time. It is 1 or 0, trust worthy or not
(nothing like slightly trustworthy). Trust occurs at professional level,
integrity level, and emotional level
Work breakdown structure

 Hierarchical organization of work to be done on a project

 Project broken down into modules
 Modules subdivided into subcomponents, activities, and tasks
 Plan
• National/Corporate plan with targets for growth

Programme • Health programme, education programme, Sc&Tech. prog.

Project
• Hospitals, schools, power plants

Work
• Water supply and distn, power supply and distrn packages
packages

Task
• Award of water supply contract, construction of foundations

• Excavation, laying of cable, preparation of drawings and

Activity sepes
Organization structure consists of three
key elements
1. Organizational structure (OS) designates formal reporting
relationship, including no of levels, span of control of managers
and supervisors
2. OS identifies the grouping together of individuals into
departments and departments into total origination
3. OS includes the design of systems to ensure effective
communication, coordination, and integration of efforts across
departments
Forms of organizational structure

Internal or external organization environment?

- Functional organization : grouping people performing similar
activities into departments
- Project organization: grouping people into project teams on
temporary assignments
- Matrix organization: companies are structured by creating a dual
hierarchy in which functions and project have equal prominence
Example of
functional
organization
Functional organization
Strengths and
weaknesses of
functional
organization
Example of
project
organization
Project organization
Strengths and
weaknesses of
project
organization
Example of
matrix
organization
Balanced matrix organization
Strengths and weaknesses of matrix organization
 CHAPTER VII
FINANCIAL APPRAISAL
Objectives

1. Introduction
2. Calculate discount rate
3. Capital budgeting techniques
4. Net present value (NPV)
5. Internal rate of return (IRR)
6. Profitability index (PI)
7. Payback period (T)
Calculate discount rate

Case 1: if the project gets loans from various sources

R is the average loan interest rate from mobilized sources

 Iv k .rk
r = k =1
m

 Iv
k =1
k
Ex3: An enterprise is considering an investment project in equipment to improve product quality. The total
investment capital of the project is 17,000 million VND and is mobilized from 3 sources
- Source 1: borrowed 10,500 million VND - annual term - interest rate 12% per year
- Source 2: borrowed 5,500 million VND - annual term - interest rate 14% per year
- Source 3: borrowed 1,000 million VND - annual term - interest rate 13% per year
Calculate the discount rate using for project appraisal.

 r = (10,500 x 12% + 5,500 x 14% + 1,000 x 13%)/ 17,000 = 12,7%

Calculate discount rate

Case 2: if loans have various terms

The interest rates must be transferred to the same term (normally an annual
term).

Where: rn = (1 + rt ) m − 1
rn: annual interest rate
rt: monthly/quarterly interest rate, 3-month interest rate, 6-month interest rate…
m = 12 if rt is monthly interest rate,
= 4 if rt is quarterly interest rate,…
 Ex9: An enterprise borrows capital to implement an investment project as follows:

Investment Loan amount Term Borrowing interest rate

source (million VND) (%/month)

Source 1 400 Year 1.4%

Source 2 650 Quarter 1.2%
Source 3 750 6 months 1.3%

r1 = 1.4% x 12 = 16.8%
r2 = (1+ 1.2% x 3)^4 – 1 = 15.2%
r3 = (1+ 1.3% x 6)^2 – 1 = 16.2%
r = (400 x 16.8% + 650 x 15.2% + 750 x 16.2%)/ 1800 = 15.97%
 Ex10: An enterprise borrows capital to implement an investment project as follows:

Investment Loan amount Term Borrowing interest rate

source (million VND) (%/month)

Source 1 500 Year 1.1%

Source 2 550 Quarter 0.9%
Source 3 700 6 months 1.0%

r1 = 1.1% x 12 = 13.2%
r2 = (1+ 0.9% x 3)^4 – 1 = 11.2%
r3 = (1+ 1% x 6)^2 – 1 = 12.36%
r = (500 x 13.2% + 550 x 11.2% + 700 x 12.36%)/ 1750 = 12.25%
Calculate discount rate

Case 3: Interest rate after tax

rd = rdt(1 – t)
Where:
rd: interest rate after tax
rdt: interest rate before tax
t: corporate tax
Capital Budgeting techniques
Investment decisions are generally called capital budgeting
decisions

- What is a Discounted Cash Flow (DCF)

The investment decisions made by taking into account the interest
that the money in hand can earn if invested in a bank or somewhere
else. This varies as per the industry standards
- What is a Non - Discounted Cash Flow (NDCF)
In Non-discounted cash flow, the interest is not taken into
consideration. In NDCF method, time value of money is not
considered.
Discounted cash flow is also called
Opportunity cost of capital
- It is the lost opportunity on the capital that is being invested in the project
- Rate of return that an organization could have earned if not invested in the
current project
- In the other word, it’s the rate of return that an organization is willing to lose
in an expectation to earn more by investing in this project
- For example: Let’s say if an organization earns 10% interest per annum on its
capital by putting the money in bank instead of investing in the project, then
the opportunity cost of the capital is 10% of its capital, which is a lost
opportunity and this 10% is taken into consideration for the projects as a
discounted rate, since it is the minimum that an organization could have
earned.
Capital budgeting decisions

•NPV – net present value

Discounted •IRR – internal rate of return
Cash Flow •PI – profitability index
•Payback period
Non- •Payback period (Payback period
discounted is usually calculated considering
cash flow the NDCF
 Future value and present value
 Net present value considers the “Time value of money”
 Money grows over time, when it earns interest
 Therefore, a dollar in hand today is worth more a dollar in the
future

FV = PV (1 + r ) n

FV: future value

PV: present value
r: discounted rate
n: number of years
Example

If $100 is invested in a bank today may earn 8% per year. What is

the future value of the $100 for 1st, 5th, 15th year?
PV = 100
r = 8%
After 1 year (n=1): FV = 100 (1+ 8%) = $108
After 5 years (n = 5) : FV = 100 (1+8%) ^ 5 = $146.9
After 15 years (n=15) : FV = 100 (1+8%)^ 15 = $ 317.21
 Present value

 Example:
If $100 is to be received after 1 year, what is the present value of
$100 today?
If $100 is to be received after 5 years, what is the present value of
$100 today?
If $100 is to be received after 15 years, what is the present value of
$100 today?
Note : Discount rate 8% per year
 FV
PV =
(1 + r ) n
FV = 100
R = 8%

FV of $100 to be received in 1 year:

FV of $100 to be received in 5 years:
FV of $100 to be received in 15 years:
 A sum of money Constant cash flows

(1 + r ) n − 1
FV = PV (1 + r ) n
FV = A
r

FV
PV = (1 + r ) n − 1
(1 + r ) n PV = A
r (1 + r ) n
Ex1:
An investment project is built in 2 years with investment capital Iv1 = 100 billion
(incurred in the 1st year), Iv2 = 200 billion (incurred in the 2nd year). The project
started operating in the 3rd year with revenue Bi = 20 billion, Ci = 15 billion. The
project life is 5 years, the residual value at the end of the project life is 50 billion.
Determine the present value of the project. discount rate is 15% per year.

 Iv0 = 100 x (1+0.15)2 + 200 x (1+0.15) = 362.25 billion VND

1+0.15 5 −1 50
 PV = (20-15) x0.15 𝑥 1+0.15 5 + - Iv0 = -320 billion VND
1+0.15 5

=> Denied.
Ex2:
Company A has a license for a period of 15 years. Company B buys the license and
pay as follows: $6,000 a year for the first 5 years, $8000 a year for the next 4 years
and $10,000 a year for the remaining 6 years (paid will be made at end of the year).
Option 2 is to pay $70,000 immediately
If the discount rate is 12%/year, which option should A accept?

1+12% 5 −1 1+12% 4 −1 1
 PV = 6000 x + 8000 x x +
12% 𝑥 1+12% 5 12% 𝑥 1+12% 4 1+12% 5

1+12% 6 −1 1
10000 x 12% 𝑥 x = $ 50242 < $70000 => choose option 2
1+12% 6 1+12% 9
Net present value
- NPV realistically predicts the future cash flows
- NPV discounts future cash flows at an appropriate industry
discount rate, the appropriate discount rate is the project’s
opportunity cost of capital
- NPV is the sum of all discounted cash flow
- If NPV > 0 (positive), the project can be accepted. The greater
the NPV, the better the project financial benefits
- Net present value = “PV of cash inflows” – “PV of cash
outflows”
n n
Bi Ci
NPV =  −
i =0 (1 + r ) i
i =0 (1 + r ) i
 CONDITIONS FOR THE PROJECT TO BE ACCEPTED

NPV > 0 NPV = 0 NPV < 0

ACCEPTED AT REJECTED
CONSIDERATION
Net Present Value

Example: Calculating NPV

A sum of $400,000 invested today in an IT project may give a series of below
cash inflows in future:
$70,000 in year 1
$120,000 in year 2
$140,000 in year 3
$140,000 in year 4
$40,000 in year 5
If opportunity cost of capital is 8% per annum, then should we accept or reject
the project?
Solution: Calculating NPV

 Step 1: Calculate the PV value of year 1, year 2, year 3, year 4

and year 5
 Step 2: Sum the PV of all years
 Step 3: NPV = present value of all cash inflows = present value
of all cash outflow
 Step 4: If NPV is positive, Accept the project, if not reject the
project
 IRR – Internal rate of return
IRR is a discount rate at which NPV (net present value) becomes zero
In other words, IRR is the opportunity cost at which NPV = 0
IRR as the name suggests, it tells how much rate of return are we getting from the
project
Why IRR, what is the use of calculating IRR?
- IRR is used to rank different projects
- The higher a project’s internal rate of return, the more desirable it is to undertake
the project
- If all the other factors are same for different projects then the project with a
highest internal rate of return value should be considered
*Note:
For constant rate of cash inflows for every year, IRR can be calculated with the help
of a formula
How to calculate IRR
1. Select two estimated discount rates
Select two discount rates that you'll use , r2 – r1 <= 5%.
2. Calculate the net present values
Using the two values you selected in step one, calculate the net present values based on each
estimation. You'll want to get as close to zero as you can.
3. Calculate the IRR
NPV1
IRR = r1 + NPV − NPV (r2 − r1)
1 𝟐

Where:
 r1 = Lower discount rate
 r2 = Higher discount rate
 NPV1 = Higher Net Present Value
 NPV2 = Lower Net Present Value
Relationship between IRR, discount
rate and NPV
 If IRR > discount rate or opportunity cost of capital => the NPV is
always positive
 If IRR < discount rate or opportunity cost of capital => the NPV is
always negative
 If IRR = discount rate or opportunity cost of capital => the NPV = 0
 Note : As long as the NPV is positive, the project is financially viable
The moment that NPV become negative, the project is NOT financially
viable
Example

The cost of a project is $1000. It has a time horizon of 5 years and the
expected year wise incremental cash flows are
Year 1: $200
Year 2: $300
Year 3: $300
Year 4: $400
Year 5: $500
Compute IRR of the project. If opportunity cost of capital is 12%. Should
we accept the project?
Pay back period

 The time it takes for the project to generate money to pay for itself
 Payback period is the number of years required to recover the cash
outflow invested in the project
 The project would be accepted if its payback period is less than the
maximum or standard payback period set by industry, senior leadership
 In terms of projects ranking, it gives highest ranking to the project with
the shortest payback period
Example 1

A Sum of $25,000 invested today in an IT project, may give a series of

cash inflows in future as described below:
$5,000 in year 1
$9,000 in year 2
$10,000 in year 3
$10,000 in year 4
$3,000 in year 5
What is the payback period (Non – discounted and discounted)?
Example 2:

 Initial investment : $300,000

 Annual cost of operation: $20,000
 Expected annual revenues:
- First two years: $100,000
- Next three years: $200,000
 Planning horizon: 5 years
Find T?
Example 3:

Project cash flow $30,000 in first year, CF is going to increase by $10,000

for the next 3 years, and then decreases by $15,000 and closes in 5th year.
Initial investment $140,000, working capital requirement is $20,000. The
company foresees to fetch a net salvage value of $35,000 after 5 years
Find T??
 Example 4:
Compare following projects using T
Year Project A Project B Project C
0 -110 -110 -110
1 20 20 0
2 30 30 0
3 40 40 90
4 30 30 30
5 20 20 20
6 20 10 20

Which project is best and why?

 Payback Period

No Name Year 1 Year 2 Year 3

1
(W+D)i
2 1
(1 + r ) i

3 (W+D)ipv
T
4  (W + D)
i =1
ipv