RATIONALE FOR EFFECTIVE FINANCIAL ANALYSIS OF
Investment project
1.1.1 The concept of investment project.
Investment activity is very important for the existence and development of every nation and every business For the country, investment is a prerequisite to promote growth, economic development and improve the living of its fellow citizens For business, the role of investment is shown at the initial stages when investor owner to fund, to put a lot of energy to its own business, etc., to build the first facility for business operation Therefore, "Investment is the funding activity at the present to achieve profitability in the future." However, to achieve the planned objective, contribute to growth, economic development, and bring benefit to investor, the first important step is to establish investment projects on the basis of scientific and in accordance with the practice.
Standing on different angles, we can make different concepts of the project. Oxford Dictionary of UK, project is defined as a mind map, a set of task, outlined plan for action According to the Australian standard (AS 1379-1991), the project is defined as a scheduled job which can be identified, has a beginning and has an ending, involves a number of activities which are closely related to each other.
World Bank - a multi-country financial institution well-known in project financing around the world – has given out the concept of the project as follows:
“Project is the total of activity policies and related costs which are planned in order to archive the certain objective within a certain period of time
In Vietnam, according to Decree No 52/1999/ND-CP dated July 08, 2009 of the Government issued regulations on investment and construction management, the
"investment project is a set of proposals relating to the capital in order to create, maintain, improve and enhance the quality of products or services over a period of specified time”.
After period of time to implementing the investment management and development of the Decree No 52/1999/ND-CP dated 08-07-1999, the concept of investment projects has been generalized and this concept hass been stated in Vietnam investment law: "Investment project is a collection of medium-and long - term proposals to conduct investment activities in a specific geographical area, in a cetain period of time".
- The goals need to be archived when implementing the project Specifically, when the project is implemented, what it will bring to the country in general and investor in particular These goals should be expressed in specific results such as revenue generation for the State budget, create jobs for employee, profitable for the investor
- Project activities The project must specify the specific action to perform, the location of the project activities, the time required to complete, the departments shall implement such action It should be noted that these activities have a relationship with each other because they are all geared towards the success of the project and the activities that take place in an environment of uncertainty. Environment of the project is not current one, it is the future environment
- Sources The activities of project cannot be implemented without material resources, financial, human, etc So, must highlight the necessary resources for the project Total of these sources is the necessary investment fund for the project A project is always building and implementing in limited resource.
To understand the detailed principle of investment project, one of the best approach methods is to understand the fundamental of project Besides, a number of banks in Vietnam prescribed period after receiving a complete dossier of customer loan until the preliminary decision "are less than 30 days This put pressure on officials evaluation work fast to capture the information of the project In order to complete the above task, the evaluation staff needs to remember the fundamental of the investment project.
In principle, the investment project often include content such as: (1) Objectives and need of the project, (2) product description and market of the project, (3) Input factors description, technology and equipment and technical issues of the project; (4) Location, land, building scale and constructions; (5) capital requirements and capabilities to arrange capital; (6) establishment and management methods; (7) Identify the financial performance; (8) Analysis of economic efficiency; (9) Conclusions and recommendations.
In theory, the investment project fundamental typically include the following:
Part I Basis of feasibility report establishment.
- The legal basis: the legal documents, the decision of the authorized State agencies, or the agreements
- Reality basis: Background of investment project, investment objectives and capacity
- The guiding principle throughout the process of formation and implementation of investment project.
Product introduction or group products (services) which are selected for production of project.
- Specification, quality standard, packaging form.
Position of the product or group of products and services in the priority list of the State
The foundation of the market for selected products and services:
- Forecasting future demand Data forecasting results
- The sources and channels meeting demand, the level of current meeting demand Forecast of meeting demand in the future, main sources and channels
- Forecasts of the level of competition, the main competitor , the main factor in direct competition , or the possibility of increasing indirect competition, level ( if any)
Determine the sales volume of product for the year: Estimated penetration , market domination throughout the life span (location, main customer group, maximum and minimum quantity).
- Product and service strategies (specification, quality, presentation form, after sales services)
- Establishment measurement or relationship expansion with the expected market.
- Advertising and other promotional solutions.
Part IV The ability to ensure and distribution method for production input factors.
Sources and input factors distribution method (raw materials, fuel etc.). Analysis of the advantages and limitations with the adverse effects that may occur
Stable distribution method of every input factor used in production, realistic assessment of project.
Part V The scale and production plan
Determine the size and production plan, the main products, additional products, providing external services, export product, products for domestic market, etc.
- Conclusions of parts II, III, IV
- Analysis of economic scale of technology chain and main equipment.
Part VI Technology and Equipment
Description of selected technology (economic features, basic technique).
- Figure of the main stages of the technology process
- Features description of the basic technologies of main stages.
Assess the level of modern, relevance, the best preeminent characteristics and limitations of the chosen technology (compared to some other schemes through technical and economic criteria as important: quality, price finished products, raw material consumption, etc.)
The need for technology transfer based on technology transfer contract The stages got problem needs the technological innovation, the target scope of technological innovation, transfer object, method transfer and method of free choice, price and payment method
Impact of the project on the environment and process solutions.
- Substances capable of causing pollution through emissions, waste water and solid waste Increase the volume of waste each year.
- The solution that the project will be used to combat pollution The equipment will be used to implement the solution.
- Composition of waste water, emission, solid waste after applying the above solutions.
- Treatment Solutions ultimate (decay, burial) of hazardous substances retrieved from emission, waste water, and project solid waste.
- The impact on the environment and overcome solutions
+ The impact on the ground (the project leader may exploit of mineral resources, soil)
+ The impact on the ecological balance (in case project uses forest resources, marine resources )
+ The other effects (dust, noise, lighting for the nearby areas)
+ Prevention and overcome solutions of the impacts mentioned above
- The obligations and responsibilities of environmental relevant subject.
Power supply technology and equipment (reason for supplying source selection, ensuring the ability to evaluate the proposed requirements, compared to other possible option
Price list and equipment (including technology equipment, power equipment, transport equipment, other auxiliary equipment, office equipment ) The total value of the project equipment
Requirements for maintenance, repair and replacement parts Spare parts supplying plan and repair and maintenance costs annually
Part VII: Consumption of raw materials, fuel, energy and other input factors
On the basis of technical and economic norms corresponding to the chosen technologies, detailed calculation of raw materials needed, semi-finished products, fuel, energy, water and other input factors
Expense calculation (Vietnam dong and foreign currencies) for each factor in each year.
Identify the providing program, to ensure stable supply, on time, the right type and quality of raw materials, semi-finished products imported from other countries should clearly identify sources of supply, payment methods , delivery time and delivery location, price of alternatives in domestic
Calculate transport demand and selected transport options
Part VIII Location and land
The legal basis of the selected location The appropriateness of the selected plan (regional development planning, construction planning).
Location description: administrative area, geographic coordinates.
The basic data: area, boundary
Conditions infrastructure (roads, electricity, water and drainage).
The social environment, population, public services
Data on the geological survey works.
Land clearance option and reasonable expenses, necessary.
Part IX Construction scale and works
Calculate the area of demand for manufactured parts, for production , inventory ( raw materials , semi-finished products , finished products , the administrative management , garages, houses permanent protection )
Arrange items of roof construction (factory, auxiliary house, office )
Calculate the scale works infrastructure in the enterprise campus, internal roads, grounds, power supply system (power, lighting, water supply systems, sewerage systems, communications, fence gates, trees
The Infrastructure category should develop outside business premises (roads, communication lines, and power transmission lines, sewage pipes, connected to the general system of the region).
Pollution prevention items: the cost of that item, the safety of the measures used.
Overview of the construction items.
Overall organizational chart The principles and measures to ensure the mismatch between obligations and responsibilities to the rights and interests each party
Labor demand in the period of the investment process and operation of the facility (annual, quarterly or monthly) Breaking out:
- By sector: direct, indirect, governance and administration.
- By skills: Skills work force and common labor
- By nationality: the Vietnamese and foreigner.
Average salary, minimum salary, maximum salary for each employee. Calculate the total annual wage bill for each stage of the project.
Manpower supply: recruitment principle, training programs (in Vietnam and abroad); annual training costs
The implementation of the design, construction, procurement of equipment installation, technology transfer, training the unit is expected to perform or participate in bidders, contracting methods The options considered the superiority of the selected plan.
Duration of investment ( start - finish ) , the progress of the work primarily ( design, negotiation , contracting , supply of equipment , construction installation , training ) Conditions to ensure progress.
Measures to ensure the necessary conditions.
Chart the progress of major work.
Progress of capital: Determine the demand for funds over time (quarter, month) In case there are many parties contribute capital or joint venture with foreign partners to determine liability , the start time and complete the contribution of each party , each party must contribute capital in each batch , which schedule to use
Capital and feasibility (realism, relevance) of funding (for projects) Plan funding from each source.
Part XIII Summary of investment demand and funding sources
Determine the total investment required for the project (including foreign currency and Vietnam dong).
- Equity capital (legal capital in the case of foreign investment) The rate and form of each contribution (in cash, machines - equipment, land use rights, technology ).
- Borrowed funds: Short-term, medium-term to long-term with specific interest rates
- Cash: Vietnam dong, foreign currencies
2 Semi-finished product and external purchasing service.
8 Cost of repair of machinery, plant and equipment
12 Land and housing rental cost
Profit and loss estimation table
Table 1-3: Profit and loss estimation table
2 Total cost of products produced
3 The cost of the inventory products of beginning of year
4 The cost of the inventory products of end of year
Estimated revenue and expenditure balance
Table 1-4: Estimated revenue and expenditure balance
1 Total revenue (excluding credit sales)
1 Income on liquidation of inventories
1 Cash expenses for production and administration
- The initial cost of land
6 Working capital and additional working capital spending
1.1.3 The cycle of investment project
Project cycle is the periods and the phases in which a project should go through, starting from the time of intended investment, until the end of the projectTheoretically the project cycle is divided into several phases.
Figure 1-1: The cycle of investment project
Evaluation for investment decision making
Investment opportunity research is to study the capabilities and conditions which investor can start investing Its purpose is to find out the most suitable investment opportunities for investor Investment opportunity research helps to identify quickly and less expensive but easy to see investment opportunity based on
Note: differences in terms of building code provision (Articles 35-
Construction and installation the basic information for the people who are able to consider investment , make the decision on when to implement the research period or not.
Pre-feasibility study is a preliminary choice of investment opportunity. Although only a preliminary choice of investment opportunity, the investor is not care less, reduce research content.
The content of the pre-feasibility study is all related issues affecting the investment activities such as market, financial, technical – economic, etc.
Evaluation of investment project
1.2.1 Evaluation principle of investment project
The investment project is documented by the investors in feasibility study. Although the projects mentioned all the aspects related to investment activities in a fairly complete and detailed, but the project could not be implemented because standing on the position of State management on investment and investment planning needs to assess the overall objective of the project's impact on the country in all aspects This necessarily requires investment project to experience a thorough evaluation process In terms of the project financing, commercial banks or financial institution pay attention to this issue, through the project evaluation will confirm the efficacy and safety of the investment So, financial institutions have solid basis for making funding decision.
Evaluation of the project is to conduct research in an objective analysis, scientifically and comprehensively all contents of technical-economic of project, placed in relation to the natural environment, economic and social to allow investment or funding decision
Evaluation of investment project activity is concerned by many agencies and various organizations However, this depends on the agency which conducts the assessment and evaluation objectives as well as different evaluation time.
For large-scale projects, the Ministry of Planning and Investment, Ministry of Finance and investment owner agency (Ministry manages industry) participate in the evaluation from the period that investor doing feasibility study for investment decision and allow to find investment fund sources.
For projects using credit investment and development of the State, lending institutions will evaluate financial plans and payment plans before they are submitted to the authorized agency for investment decision.
For provincial management project, Department of Planning and Investment and the local government will evaluate feasibility of the project for investment decision.
Financial and credit institutions will evaluate the project in terms of effectiveness, feasibility, repayment plans and investment financing decision.
1.2.2 Purpose of evaluating investment project
The purpose of the evaluation of investment projects is to help investors and institutions involve in investment activities to select the best investment option, investment decision in the right direction and achieve socio-economic benefits as they want through investment project.
For investor, project assessment is implemented independently with the
From that, they can see the shortcoming in the drafting process for timely replenishment
For the state management agencies in the field of investment and construction, project assessment purpose is to assess the suitability of the project for the development planning of the sector, local and the nation on: target,
1.2.3 Evaluation content of investment project
In an evaluation of an investment project, commercial banks usually require evaluation staff to issue project report: The content of this report of different commercial banks may differ in form However, in terms of content, the project evaluation report of the Vietnamese banks usually focuses on 8 main contents:
1 To evaluate the legality of the project.
2 To evaluate the necessity of the project.
3 To evaluate the efficiency of the market project
4 To evaluate the efficiency of project engineering.
5 Evaluation of the total investment and capital of investment project.
6 To evaluate the financial performance of the project.
7 Evaluation of social-economic efficiency
8 Risk analysis of the project.
Project evaluation report with 8 above contents along with an assessment over the investor (usually including legal capacity, reputation, financial capacity,ability to do business, etc.) and evaluation report of guaranteed asset are the basis for bank to make the decision on funding the project.
The indicators reflecting the result of project
Here we will explore some of the methods used to evaluate the project in term of financial management These methods include: (a) PB payback period, (b) the net present value, NPV (c) internal rate of return, IRR In other words this is also the main criteria for evaluating the feasibility of the project financially
1.3.1 Net present value (NPV) a Conception
Net present value NPV is a method to evaluate the profitability of the project on the basis of discounted cash flow techniques This method consists of three major steps:
1 Calculate the present value of all cash flows of the project, including input cash flow and output cash flow, use WACC capital cost of project as the discount rate.
2 Calculate the present value to get the NPV of the project.
- When a project with NPV0, then NPV is the net profit of project after covering the initial investment and the cost of raising capital.
- If two projects are mutually exclusive, NPV of which project is greater then that project is better with condition that NPV is positive. b Determination formula
Mathematically, the NPV calculation is represented by the following formula:
= CF 0 + CF 1 (PVIF k%,1 ) + CF 2 (PVIF k%,2 ) + … + CF n (PVIF k%,n )
In the formula above, CFt is the expected cash flow of the project at the end of t year and the cash flow can become negative or positive depending on the input
The function of the present value of NPV income-expense difference:
To calculate the present value of income-expense difference, we insert into Excel sheet with the following function:
Formula: = NPV (rate,value1,value2, ) ( Formula 1-2) in which:
Value1, value2,…: Are the values of the cash flow which is calculated by a certain period, usually calculated for each year (can use 1 to 29 of value). c Decision making based on NPV
So, NPV is the method shows the absolute profit of the project that depends on the capital cost of project In theory, NPV is the best method to assess the profitability of the project because it is calculated based on the capital cost of the project.
However, NPV method is difficult for calculation because it requires determining the exact cost of capital Moreover, the NPV does not indicate profitability measured by the percentage so it is not convenient for comparing investment opportunity For example, if the life span or investment capital of projects A and B are not equal, the selection of one of the two projects is abosolutely difficult Therefore, we need a method to calculate the profitability of the project as a percentage, which is the method of internal rate of return IRR.
Figure 1-3: Decision making based on NPV
1.3.2 Internal Rate of Return (IRR) a Definition
To understand the nature of the IRR method we need to consider and answer the following question: If 100 billion is invested in a project, and in turn for
3 next years an annual income of 10, 60, 80 billion is received how many percent of return rate each year this business will be entitled to? Such rate of return is called internal rate of return IRR of the project A. b The formula to determine the IRR
To determine IRR we must use the current value principle: The value of the investment capital is the present value of all future benefits that investment brings, discounted at original time with a discount rate which is the internal rate of return of the project In other words, the IRR is essentially a discount rate so that the present value of the cash flow out of the project is equal to the present value of the cash flow in of the project This also means that the IRR is the discount rate that the project's NPV equal to zero.
This rate is called internal because, according to the above definition, it just depends on the cash flow of the project but not dependent on external factors reflected in the cost of raising capital - a factor decided by outside capital providers.
The IRR calculation method hasthe following form, and to solve this formula we need to use interpolation methods or computer.
= CF0 + ++ … + (formula 1-3) = CF0 + CF1(PVIFIRR,1) + CF2(PVIFIRR,2) + … + CFn(PVIFIRR,n)The function of internal profit rate (IRR):
Values: are a sequence of number or a reference to the cell containing the values that we want to calculate the internal benefit rate It must contain at least one positive value and one negative value to calculate the IRR. c Decision making based on IRR
IRR method shows the profitability of the project by percentage, so it is very convenient for comparing investment opportunities This criteria for evaluating project is very important because if the internal return rate is greater than the cost of raising capital a certain surplus will appear after repayment of capital and cost of capital, the surplus is evidently owned by the project's investors Conversely, if the IRR is lower than the cost of capital, the project will bring financial losses to investors.
Thus, the IRR can be considered as the project's breakeven threshold and thus is useful for the evaluation of the project Some other characteristics and limitations of the IRR method will be clarified in the next section when comparing two methods of NPV and IRR.
Figure 1-4: Decision making based on IRR
1.3.3 Payback period of PB a Concept
The payback period is defined as the time required for annual net income of the project to cover the investment costs as well as funds raising cost for such investments However, to better understand the nature of this criterion we need to distinguish the two concepts of payback period, which is the simple payback period, and discounted payback period
Simple payback period PB is expected payback period of the project but does not include the cost of capital use Calulation rule of this criterion consists of 2 steps First, determine the cumulative cash flows based on expected cash flows of the project Cumulative cash flow answers the question: at any time of projects how much is the capital which is not yet recovered or net income? Cumulative cash flow is calculated by adding the cumulative cash flow of the project as shown in the following table.
Accumulated adding results show by late 2nd year of the project A there is still 30 billion VND of investment capital has not been recovered, but by the end of
Reject project b The formula to determine the payback period
The payback period is calculated as follows:
PB = number of years before complete recovery of capital +
(Formula 1-4) c Decision making based on payback period.
If any projects have PB smaller than permitted period, that project is selected, the project has a shorter payback period it would be better for the recovery of capital However, the simple payback period is a pretty loose criteria because it does not reflect the ability to cover the cost of raising capital For this reason it is necessary to pay attention to the discounted payback period.
Profitability ratio PI
Profitability indicator of a project is the present value of the cash flow brought by investment projects, divided by initial investment capital of the project.
PV : Current value of future cash flows brought by investment projects
I : Initial investment capital unpaid amount in next year cash flow in the next year
1.4.3 Decision making based on profitability indicator
Figure 1-5: Decision making based on profitability indicator
Note: If investment projects are mutually exclusive investment projects, we choose the largest PI projects and the PI must be greater than 1
FINANCIAL EFFICIENCY ANALYSIS OF THE PROJECT
About Manh Bac Son Trading and Technology Company Limited and Project
2.1.1 An overview of the process of formation and development of Manh Bac Son Company
Company Name: Manh Bac Son Trading and Technology Company Limited English Name: Manh Bac Son Trading and Technology Company Limited Abbreviation : MBS Co., Ltd
Business address: No 86 Tam Trinh Road, Yen So Ward, Hoang Mai district,
Legal representative: Mr Le Van Manh - Position: Director
Founded in October 2003 under the business registration number 0102010310 issued by Department of Planning and Investment of Hanoi.
MBS Co., Ltd is a trading company, its goal is to become a professional distributor of industrial pump products for Vietnam market of prestigious manufacturers in the world.
* Scope of MBS Co.,Ltd:
- Import and trade industrial equipment, machinery;
- Trading of chemicals used in industry (excluding chemicals banned by the state);
- Consulting, construction and installation of water works and wastewater treatment;
- Building and construction of civil, industrial, transport, irrigation works, housing,urban infrastructure and industrial parks.
- Construction consulting and installation of refrigeration and electric works;
- Production and processing of machinery, equipment, components, parts, tools for mechanical engineering.
MBS Co., Ltd has made steady progress, revenue growth, a team of experienced staff, good service, large showroom in Hanoi.
2.1.2 Organizational structure of Manh Bac Son Trading and Technology Company Limited
Figure of organizational structure of the company
Figure 2-1: Figure of organizational structure of the company
2.1.3 Basic functions and tasks of management departments
- Advise Director on matters related to the business using corporate funds;
- Develop and implement plans to capital recovery to ensure funding for implementing the annual investment plan approved by the company;
Vice Director for business Vice Director for finance
Sales Staff Install and maintain st
- Operate services of real estate exchange, operate services real estate services in accordance with business registration certificate;
- Implementation of marketing, advertising and sales to ensure quick capital recovery and maximize profits;
- Perform periodic and irregular reports at the request of company director;
- Other duties as assigned by the Director of the company.
- Proactively deal with state agencies, concerned agencies to better complete the tasks mentioned above;
- Request departments to provide information and documents related for business process at the request of the company director.
- Receive Sales orders, goods inspection, conduct product assembling and report progress to sales department, board of directors
- Receive customer request, report to board of directors on the progress of the installation and maintenance of machinery and equipment.
- Search for customers, establish relationships with investors, consultant, designer, construction companies.
- Do cost estimation, prepare bidding documents, bid for contract
- Cooperate with departments of accounting, technology, import and export, to prepare bidding documents.
- Coordinate with sales department to conduct business contract performance when winning contracts
- Do report to the director on the progress of each project.
- Create a good working environment for the company, ensure hygiene and safety
- Ensure proper and sufficient supply of stationery, office machinery.
- Make plan for repair and purchase of stationery products, maintain stationery equipment.
- Search and recruit personnel, train and instruct personnel in accordance with profession of work.
- Check and assess attitudes of internal rules and regulations of staff
- Prepare time and attendance checking,
- Manage incoming and outgoing documents, prepare documents at the request of the director.
- Save and manage document, dispatch documents, labor contract etc.
- Advise the Director on appointment, recruitment, planning, training, management of records of staff and workers of the company, track emulation and rewards, promote salary increase, sense of the observance of the operational rules of company;
- The legal work and document test before release;
- Summarize regular and irregular reporting for management agencies as prescribed;
- Track and store incoming and outgoing documents, manage use of corporate assets on the principle of economy, efficiency, organization of company safety protection;
- Advise the Director on the financial plan of revenues and expenditures on monthly, quarterly and annually basis, measures to ensure the implementation of the financial plan of revenues and expenditures of the company.
- Advise the Director on plan of creating as well as using resources of teh company every month, quarter or year.
- Actively coordinate with departments to set up business plans and debt
- Open, manage and use accounts at commercial banks;
- Check the validity and legality of documents, debt collection, check management and use of properties and materials, check compliance of state policies related to income, costs, distribution of business results;
- Carry out writing, accurately reflect timely, sufficiently and correctly data and information of accounting profession, payment situation, use of assets, materials and capital, the implementation of costs, income and company's results on vouchers, detailed book, master book and reports in accordance with standards and accounting system;
- Summarize, compile and submit financial reports in accordance with legal regulations Provide necessary information to superiors and the authorities;
- Other work assigned by the Director of the company.
- Having the right to request the company's departments to provide documents and data related to reporting to the Director and the relevant authorities in accordance with regulations;
- Having the right to request the company's departments to organize measures to use economically, effectively and protect the assets of the company;
- Having the right to request departments to promptly and suficiently provide documents related to data planning, accounting, accounting examination and inventory of assets of the unit;
- To proactively deal with state agencies, the concerned agencies to better organize the tasks mentioned above.
- Advise and assist the Company's Board of Directors to manage the professional work, import and export work.
- Implement international trade and international cooperation.
- Provide import and export services and perform a number of other tasks, powers in accordance with position classification, authorization by the General Director and in accordance with law.
- Work out strategic orientation of business activities of import and export of the Company;
- Closely monitor and capture timely market conditions, prices, the demand for imported and exported goods to advise the Board of Directors on negotiations towards signing of economic contracts;
- Research and follow-up all import and export, tax policies of the state to organize implementation in accordance with regulations;
- Be responsible for drafting, establishment of foreign trade contracts, conditions and forms of payment Make good professional import and export procedures in accordance with regulations as well as monitor the implementation of the contracts, contracts liquidation;
- Perform statistical reporting regime prescribed by the State and at the request of the Board of Directors of the Company, build communication channels of commerce, and information management related to activities of import and export of the company through information systems;
- Research foreign and domestic markets to plan and organize the implementation of the import and export business plan and related plans of the company Search for domestic and foreign clients wishing to purchase goods and foreign trade services Implement business of import and export including services of warehousing, customs clearance, transport etc in foreign trade operations;
- Provide documentation of export and import, invoices of goods, and strictly manage goods and inventory system of the Company;
- Implementa business contracts of import and export as authorized to sign contracts in this area;
- Perform management functions of the company brand Monitor and report to the Board of Directors of the commercial promotion, brand promotion Register trademark in the country and countries or territories where the Company has the ability to export;
- Coordinate with related Departments, divisions to help General Director in customers entertainment, negotiations, transactions, contracts with foreign customers;
- Coordinate with related Departments, Divisions in introduction, offering products and services of the Company at trade fairs abroad, market research, professional exchange, collect information in order to expand the international market;
- Perform clearance contract procedures for import contracts of machinery and equipment for the Company;
- And other duties as assigned by the Company's Board of Directors.
Project of production of wood pellets
2.2.1 Overview, context of the project
Investor : Manh Bac Son Trading and Technology Company Limited Tax code : 0101417960
Registration location: Hanoi Department of Planning and Investment
Head Office Address: 86 Tam Trinh - Hoang Mai - Ha Noi
Project Name: Factory of wood pellets from straw
Construction Location: Tan Lien industrial park - Vinh Bao - HP (expected) Project Objective: Building manufacturing factory of wood pellets from straw
Type of investment: Investment in new building
Forms of Management: Investor directly manage project through project management unit established by investor.
The area of used land: 10,000m 2
2.2.2 The necessity of the project
Currently, agricultural residues are usually handled by households with burning methods causing environmental pollution and fire risk especially in dry season The uncontrolled burning of straw also obstructs vision, motorcycles or car fire and explosion when moving on roads.
On the other hand, the current demand for fuel for households (used for cooking), factories use coal, heavy oil for furnace as well as heating purposes in cold climate areas such as Eastern Europe are rising However, the use of fuels inlcuding mainly coal, oil, natural gas and electricity with rising prices, natural resources dwindling and are extremely critical as they cause environments polluted and hazardous.
Straw is used as fuel in rural areas popularly years ago, but due to the process of social development it is now no longer used as fuel So instead of expensive, toxic and dwindling fuels causing pollution it needs to be replaced Wood pellets from straw is an alternative fuel for the above fuels which bring saving on the money and solves the problem of environmental pollution So wood pellets from straw was born with convergence of many advantages and has been tested extensively in use in developed countries.
Compared to coal, wood pellets heat reaches 70% but costs only 45%, while compared to DO oil wood pellet heat reaches 78% but costs only 30%, every 2kg of wood pellets equals 1kg of DO oil, compared with the current price of electricity, releasing energy but use of wood pellets will save 50% cost, moreover use of wood pellet causes less pollution than coal Also as wood pellet does not include impurities such as sulfur like coal, so it is environmentally friendly Every 1000kg wood pellets burned out of calories remain 10 - 15kg clean ash The amount of waste (ash after burning) is Biomass ash used as plant fertilizer, farm fertilizer, microbiological fertilizer which does not affect the environment So the use of wood pellets is effective not only in economic terms but also contributes to solving waste resources in agriculture, forestry, does not pollute the environment, and restrict fire and explosion.
With growing demand for fuel, and awareness of the advantages of wood pellets, as well as the strengths of input fuel source which is readily available, our company has decided to invest in building factories producing wood pellets The factory is built in Tan Lien industrial park with a capacity of 3.5 tons/hour It gets input from straw, rice husk, sawdust, shavings, wood chips etc to produce wood pellets.
By adopting advanced technologies meeting standards and quality, we believe that wood pellets will be widely used as fuel for households, industrial purposes and meet the difficult export markets such as Japan, Korea and European countries.
2.2.3 Scale and solutions of implementation a The scale and area of construction.
- Implementation capacity: Phase 1 (materials in the district, and the neighboring communes)
Firstly we will calculate a problem as follows:
+ A commune generally has an agricutual area of 270ha farm now
+ 1 year there are 2 harvest seasons (usually in the North, winter-spring crop usually has less straw than summer-auturm crop)
+ Total amount of straw/total agricultural area of a commune
Qnlv = 270x1.5x2x35% = 283.5 tons/year (with procurement efficiency of 35%).
+ The factory is located in the center of the district so the procurement of raw materials can cover the whole district and can expand into the surrounding districts ΣQQnlv = 283.5 x 30 = 8,505 tons/year
Tyear: working time in a year
So with the only resource in a district with the main raw material of straw and with the efficiency to purchase of 35% of the total amount of straw in the district If the company purchase more rice husk, sawdust to serve production, we may have > 4 tons/h of input materials.
+ With calculation by the equipment provider 1 ton of output material requires 1.2 tons of input raw materials
So the company chooses to build plant with product capacity of: 3 tons/h
Conclusion: From the above calculations we decided to go to the plant's capacity of 3 tons/h, 7,488 tons/year.
- Phase 2: depending on the performance of the factory in phase 1, time and capacity of the plant will be calculated and cost estimate will be redone after the first year of operation, it is expected to raise its capacity to 15,000 tons/year. b The work items:
1 Pre-engineered steel buildings (containing machinery and equipment for manufacturing)
2 Pre-Engineered Steel Buildings (Storage of raw materials and products)
II Machinery and equipment categories
+ System for cutting and chopping straw, twigs, wood scrap etc.
+ Crystal material grinding system System 1
+ Systems of conveyor, silos, dust filter etc System 1
4 50 ton electronic weighing station Station 1
5 300KVA Transformer and power lines set 1
6 Fire protection system (pump, fire extinguishers in place etc.)
Machinery and equipment our company import from China are produced by manufacturer GOME, GOME will support installing, operating and training until the plant operates stably.
Why supplier GOME and Chinese equipment?
- The first is investment capital
- The second is GOME’s experience
- The third is delivery and installation
Some pictures of the equipment and supplier’s experience
Figure 2-3: Equipment 2 c Engineering solutions c.1 Wood pellet
Wood pellets as biofuel is produced from the raw materials of vegetable waste such as straw, sawdust, rice husk, corn stalks etc thedịch vụ are redundant material of agricultural and forestry products.
Under the impact of the compression pressure increasing the temperature of the fuel to create natural links forming tablets, so they do not include additives. Tablets generate large amounts of heat due to low humidity (less than 10% of the natural moisture of 30-60%).
Wood pellets are in general uniform shape (diameter of from 1/4 - 5/16 inch, length of from 1 - 1.5 inches) which makes it easier to be stored and easier to use than any biofuels Its technology of heat creation is pretty simple and reduces operation of maintenance This system is easy to install and saves a lot on energy costs while providing more real benefits of economy and environment.
In environmental perspective, wood pellets are ideal It transfers available infinite surplus material into the source of clean and efficient energy Wood pellets are carbon neutral because they are part of the carbon cycle Burning wood pellets generate CO2, plants absorb this CO2 So wood pellets are clean sources of
Currently customers worldwide use wood pellets, due to its safety and renewability wood pellets should be more effective than other fuels, its amount of heat meets the most stringent standards of the EPA (The environmental protection Agency) They found that in the post-Kyoto Protocol period, the generation using wood pellets fuel is a form of economic and environmental protection business The scientists also said that the shifting to using wood pellets will stop the greenhouse effect.
* The benefits of wood pellets
The biggest benefit of biofuels is that its cost is only about 25-50% compared to fossil fuels and its price stability In addition, biofuels reduce the global environmental problems such as acid rain, the greenhouse effect.
In addition, wood pellets has the following benefits:
- Made of extra – waste materials of agriculture and forestry so it is abundant and limitless.
- Simple production technology, operation, using less manpower
- Convenient and easy to use, stow, transport, store in large quantity with a smaller area than the other biological materials.
- Create high energy with low ash
- Price stability compared to fossil fuels.
- Fuel in industries (replacing coal, FO oil, DO oil etc.)
- Fuels for households (using dedicated incinerators to generate blue flame like gas stoves, no odor)
Figure 2-4: Stove using wood pellet
* The cost of wood pellets compared to other fuels
- One ton of wood pellets equals to 120 gallons of oil (about 4.5 USD/gallon). Wood pellets produce the same BTU energy but 42% cheaper than oil.
Financial efficiency analysis of the project of wood pellet production
2.3.1 Net current value (NPV) of the project
Table 2-15: Net current value (NPV) of the project
Fixed general expenses excluding depreciation
Depreciation of plant and equipment
NPV with capital costs of 12% 4,469,267
Net liquidation value Equipment Plant
Profit and loss upon liquidation 794,926 (3,947,400)
Result of analysis shows that NPV = 4,469,267 > 0 (with the price of domestic products)
As calculated from the table above it shows IRR = 22%
2.3.3 The payback period of the project
Table 2-16: The payback period of the project
Thus, the project payback period is within 3 years 6 months
2.3.4 Rate of return of the project (PI)
According to the calculation results in the table we see
2.3.5 Economic – Financial efficiency a Economic assumptions and the basis of calculation
Assumed parameters used to calculate the economic efficiency of the project on the basis of calculations of the implemented projects, documents relating to the sale price, materials provided from the investor, namely as follows:
- Operational duration of the project is 15 years and it goes into operation from October 2013
- Systems of equipment and machinery to be invested to ensure good operation of the project.
- Project revenue earned from the wood pellet products sold in domestic market and for export partly.
- Depreciation cost of fixed assets applies MACRS depreciation method under chapter IX spreadsheet
- Provisional interest rate for VND is 12%/year
- Corporate income tax of 25% b Revenue from the project
Based on the plant capacity and business plan of the project, as well as needs of domestic and export markets, the company provisionally calculate project revenue as follows:
The plant operates with a maximum capacity of 5tons/h, but in the first year as the new plant does not have operating technique, the market is not large, so the initial capacity of the plant is 3tons/hour Expectations after 5 years of the plant is stable operation with a capacity of about 4.4 to 4.5 tons/h For following years each year it increases 10% per year, so we have the capacity table as follows:
Wood pellets are common products used as industrial, civil fuel, for heating and bedding farm etc., are preferred, sales of products are from two sources of export and domestic sales Proportion of domestic sales is primary so we temporarily calculate revenue primarily from the domestic sale.
Assuming that production costs in the first year is 2000 and stable within 5 years (no significant increase)
Capacity ton/year 7,488 8,986 10,783 12,939 15,527 Inventory volume 749 899 1,078 1,294 1,553 Sales volume 6,739 8,087 9,704 11,645 13,974 Unit price 2,000 2,000 2,000 2,000 2,000
Production and sales cost 6,009, 894 7,139, 861 8,482, 155 10,076, 800 11,971, 238 Depreciation expenses 0 810,
Project revenue increases each year due to increasing operating capacity of the plant, search for long-term consumption market Factory set reasonable production plan so that the plant can operate stably and effective in a long period along with the project.
Summary table of the project targets
Table 2-20: Summary table of the project targets
3 Internal rate of return IRR% 22%
5 Rate of return of the project (PI) 1,28
The planning process, analysis and calculation of above financial indicators show the project will bring profit to investors, yielding is also higher than expectations of investors, and the payback period is short.
CONCLUSION AND SOLUTIONSnclusion and solutions
Orientation of the company to project list
In the coming time to create value for the company, shareholders, the project should focus on the following issues a Orientation in organizing production
- Develop business plans to maximize the design capacity of the plant
- Be proactive in input material to stabilize the material to ensure adequate supply of raw materials to the continuous factory operation
- Search supply of particle board, and sawdust to ensure materials, accumulate sufficient material
- Train technical workers to professionally operate line to create stability for the operation of the plant and create high-quality products.
- Improve fire safety, train and rehearse fire and explosion situations to be proactive in fire.
- Storage of raw materials and finished products to ensure quality is not in humidity which reduces product quality. b Orientation in the business organizations to promote products on the market.
- Implementation of the Marketing and product promotion to consumers, manufacture organization of dedicated kitchen to serve the needs of consumers to promote effectiveness of the product.
- Marketing to factories which use steam boiler systems, drying systems that use coal as fuel and FO, DO fuel, this market is promising because of large demand.
- Trade promotion in cold countries in order to sell products for export abroad, this market will bring higher profits
- Develop strong communication and promote the products to the market in the shortest possible time
- When the product is in the market place it is necessary to study plan of new project construction, increasing the capacity of existing plants
- This product is in the first phase so it is necessary to implement quickly and strongly to dominate the market, as the market has accepted the use wood pellets instead of other alternative product, it is necessary to produce in mass to dominate the market
Selection or rejection of investment project
Project of manufacturing factory for wood pellets has many positive impacts on socio-economic development, contributing to the growth development of the national economy in general and the region in particular State and locality have budget revenues from VAT, corporate income tax, export tax.
In addition, the project also solves the matter of using large quantities of agricultural and forestry waste, protect the environment, create jobs for workers with high incomes.
For investors investment in the project will bring high returns from the project, create a reputation for the company and bring firm market.
Through financial indicators such as NPV = 4,469,267, internal rate of returnIRR = 40%, payback period is 3 years 6 months including construction period This shows that the project will bring high profits for investor, greater confidence when the ability to pay debt is high and rate of returns is high In addition, the project will contribute to protection of the environment, contribute to the state budget and create jobs for local workers.
Solutions
a Calling for investment capital for the project
- The project is executed only when succeeding in calling for the necessary capital to invest in the project, in the context the world and domestic economies are facing difficulties, capital in businesses (shareholders) is very scarce, shareholders do not risk in long-term capital investment The mobilization of funds for the project is very difficult, it is necessary to do a better job of project planning, project evaluation and how to make the project really compelling to shareholders.
- Need to obtain an investment license in order to be able to convince shareholders as well as commercial banks so that the project can be implemented successfully.
- Take advantage of all incentives of local authorities, levels of government, natural resources and environmental department to highlight the necessity, prominence and financial performance of the project in order to attract capital
- This is a new project in terms of both products and new investment so calling for investment from shareholders as well as banks is very difficult, requires specific strategies b Other solutions
- During construction of the plant it is necessary to perform all operations simultaneously to shorten the construction and installation time, put their project into production, this is one of the important factor to increase financial efficiency indicators of the project.
- Increase revenue, quick market penetration so that project NPV is large.
- Save fuel, electricity, production costs, particularly transport costs to reduce cost per unit of product
- The project of wood pellets production on environmental perspective or analysis of financial performance the investment in the project is entirely possible to bring benefit to society, investor, shareholders etc.
- In case of project investment, carry out simultaneously and find solutions so that many projects can be promoted efficiently
For the thesis and personal research student
- During the learning process the research student has accumulated a lot of useful knowledge across 12 subjects, has applied the knowledge learned in business practice, and promote efficiently somewhat.
` - During the thesis writing, despite a lot of efforts, study and research, hard working, along with the help of professors and doctorates and friends, especially the direct advisor, Dr Pham Long, but with limited time, experience with no analyzing experience so the dissertation writing process was perplexed with inevitable errors.
I do look forward to comments of teachers and friends so that the project can go to reality, the thesis may be further improved.
Once again, sincerely thanks to teachers and classmates, and advisor, Dr.Pham Long