Financial evaluation of the wood pellet project

Paris Graduate School of Management Thai Nguyen University INTERNATIONAL EXECUTIVE MASTER OF BUSINESS ADMINISTRATION THESIS FINANCIAL EVALUATION OF THE WOOD PELLET PROJECT LE VA MANH * I e M B Le Van Manh Student’s IDs ID VN1001224 Class: ieMBA.B03 (october)2013 Paris Graduate School of Management Thai Nguyen University LE VAN MANH ID: VN1001224 Class: ieMBA.B03 October 2013 ACKNOWLEDGEMENT Over the years study MBA course - international business administration, cooperation between Thai Nguyen University and the University of Management of Paris, France, I was taught by enthusiastical teachers with knowledge of business administration Based on theoretical basis and practical working, I chose the topic " Financial efficiency analysis of wood pellets project"as research topic for my dissertation with the desire to analyze the project effectiveness that Manh Bac Son Trading and Technology Company Limited intending business investment I would like to express my sincere thanks for all the teachers - who have dedicated instructed and provided me with necessary knowledge for my research and completion of thesis In particular I would like to sincerely thank Teacher - Dr Pham Long – the person who has enthusiastically guided me to complete this topic I would like to sincerely thank Board of Directors and officers, employees of the Manh Bac Son Company who have facilitated, provided information and documents so that I can complete my research projects I would like to sincerely thank PGSM training programs, IeMBA.B03 class students, friends, colleagues who have provided valuable material as the basis for my thesis and have encouraged me to complete my research project Sincere thanks! i TABL OF CONTENTS ACKNOWLEDGEMENT i TABLE OF CONTENTS ii LIST OF TABLES iv LIST OF FIGURES v INTRODUCTION iv CHAPTER 1: RATIONALE FOR EFFECTIVE FINANCIAL ANALYSIS OF THE PROJECT .5 1.1 Investment project 1.1.1 The concept of investment project 1.1.2 Fundamental of project 1.1.3 The cycle of investment project 17 1.1.4 Classification of investment project 22 1.2 Evaluation of investment project 27 1.2.1 Evaluation principle of investment project 27 1.2.2 Purpose of evaluating investment project 28 1.2.3 Evaluation content of investment project 28 1.3 The indicators reflecting the result of project 29 1.3.1 Net present value (NPV) .29 1.3.2 Internal Rate of Return (IRR) .31 1.3.3 Payback period of PB 33 1.4 Profitability ratio PI 34 1.4.1 Concept 34 1.4.2 Formula 34 1.4.3 Decision making based on profitability indicator 35 CHAPTER 2: FINANCIAL EFFICIENCY ANALYSIS OF THE PROJECT OF BUSINESS AND PRODUCTION OF WOOD PELLETS 36 2.1 About Manh Bac Son Trading and Technology Company Limited and Project of production and trading of wood pellets 36 ii 2.1.1 An overview of the process of formation and development of Manh Bac Son Company 36 2.1.2 Organizational structure of Manh Bac Son Trading and Technology Company Limited 37 2.1.3 Basic functions and tasks of management departments 37 2.2 Project of production of wood pellets 42 2.2.1 Overview, context of the project 42 2.2.2 The necessity of the project 43 2.2.3 Scale and solutions of implementation 44 2.2.4 Assessment of environmental impact 55 2.2.5 WOST analysis, market strategy 58 2.2.6 Calculate the total of project investment .60 2.2.7 Capital for project implementation .66 2.2.8 Calculate the project cost 69 2.3 Financial efficiency analysis of the project of wood pellet production 75 2.3.1 Net current value (NPV) of the project 75 2.3.2 Rate of return IRR 76 2.3.3 The payback period of the project 77 2.3.4 Rate of return of the project (PI) 77 2.3.5 Economic – Financial efficiency 77 Chapter 3: CONCLUSION AND SOLUTIONSnclusion and solutions .81 3.1 Orientation of the company to project list 81 3.2 Selection or rejection of investment project 82 3.3 Solutions .82 CONCLUSIONS 84 LIST OF REFERENCES 85 iii LIST OF TABLES Table 1-1: Revenue 13 Table 1-2: Production, service costs 14 Table 1-3: Profit and loss estimation table .15 Table 1-4: Estimated revenue and expenditure balance 16 Table 1- 5: According to the scale and nature .23 Table 2-1: The work items .46 Table 2-2: Specifications .52 Table 2-3: Other standards 52 Table 2-4: Table of construction items 62 Table 2-5: Table of invested machinery and equipment 63 Table 2-6: Table of total investment 66 Table 2-7: Capital for project implementation .67 Table 2-8: Plan of loan principal repayments and loan interest expense .67 Table 2-9: Cost of labor 69 Table 2-10: Table of input raw materials costs 71 Table 2-11: Retail price of living electricity 72 Table 2-12: Summary table of operational expenses of the project .74 Table 2-14: Depreciation calculation table 75 Table 2-15: Net current value (NPV) of the project .75 Table 2-16: The payback period of the project 77 Table 2-17: Capacity per year 78 Table 2-18: Revenue 79 Table 2-20: Summary table of the project targets 80 iv LIST OF FIGURE Figure 1-1: The cycle of investment project 18 Figure 1-2: Some different views of the project cycle 22 Figure 1-3: Decision making based on NPV 31 Figure 1-4: Decision making based on IRR 33 Figure 1-5: Decision making based on profitability indicator 35 Figure 2-1: Figure of organizational structure of the company 37 Figure 2-2: Equipment 47 Figure 2-3: Equipment 48 Figure 2-4: Wood pellet 49 Figure 2-4: Stove using wood pellet 51 Picture 2-5: Image of production lines 52 v Le Van Manh - IeMBA.B03 INTRODUCTION Urgency of the thesis (Rationale for studying) Currently, agricultural residues are usually handled by households with method of burning That causes environmental pollution and highest fire risk in dry season The uncontrolled burning of straw also obstructs vision, makes motorbike and car be on fire and explosion while being on the road On the other hand, the current demand for fuel for households (used for cooking), coal, heavy oil furnace for factories as well as heating purposes in cold climate areas such as Eastern Europe is increasing dramatically However, the use of fuels which are mainly coal, oil, natural gas and electricity with high increased prices, natural resources are more and more exhausted and the specifically important thing is that this will pollute the environmental Straw was used as popular fuel in rural areas many years ago, but due to the process of social development it is now no longer be used as fuel So in order to replace expensive, polluted and exhausted fuels, alternative fuel will be needed Wood pellet from straw are an alternative fuel for the above fuels which help both saving expenses and solving the problem of environmental pollution Therefore, the birth of wood pellet from straw converges many advantages and has been tested extensively for using in developed countries Compared to coal, the heat of wood pellet reaches 70 % but costs only 45 %, and compared to DO oil, the heat of wood pellet reaches 78 % but only costs 30%, each 2kg of wood pellets equals to 1kg of DO oil; compared with the current price of electricity, the usage of wood pellets also saves a lot more expenses Thus, with the same level of releasing energy, using wood pellets will save 50 % cost, moreover, fuel pellet causes less pollution than coal as pellet does not include sulfur like coal For each 1000kg wood pellets after burning calories, the remaining will be 10 - 15kg clean ash The amount of waste (ash after burning) is biomass ash which is used as fertilizer, farm fertilizer, compost which not affect the environment Le Van Manh - IeMBA.B03 Hence, using wood pellet is effective not only in economics but also contributes to solving waste resource in agriculture manufacturing, forestry, which does not pollute the environment, and fire restrictions Due to the growing demand for fuels and advantages of wood pellets, as well as the strength and availability of the fuel source input, our company has decided to invest in building factories for producing wood pellets The factory is built in Tan Lien industrial park with capacity of 3.5 tons / hour The input material is straw, rice husk, sawdust, shavings, wood chips for producing wood pellets By adopting advanced techniques with standard and quality, we believe that wood pellets will be widely used as fuel for households, industries and meet the demand of difficult market, such as Japan, Korea and European countries As such, I selected the topic "Financial performance analysis of wood pellet project" as the subject of thesis master Research objectives - Systemize some basic theories based on the financial performance analysis of wood pellet project - Analyze indicators reflecting the effectiveness of the project - Analyze challenges, opportunities, strengths and weaknesses of the investment in wood pellets production project - Decide to invest into the project or not - Make decision about the financial effectiveness of the project Research questions - How to calculate the estimated revenue of the project? - How to calculate the estimated costs of the project? - How to calculate the estimated profit and cash flow of the project? - How is financial performance of the project reflected through financial indicators? Research scope - Object research: Le Van Manh - IeMBA.B03 Financial effectiveness research of wood pellets production project Space range of research: During the analysis of financial indicators of the project, the researcher considers the scalability of the project, output market, market segment of the product at each stage - Time range of research The thesis is divided into stages: + Collect documents, write chapter in estimated time of weeks (01/08/201315/08/2013) + Data processing: week (16/08/2013 - 23/08/2013) + Analyze and write chapter 2: weeks (24/08/2013 - 16/09/2013) + Analyze and write chapter 3: week ( 17/09/2013 - 25/09/2013) + Present and approve the thesis: week + Thesis translation and submission