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

Total investment capital ...53 CHAPTER III...57 ECONOMIC AND FINANCIAL BENEFIT ANALYSIS OF INVESTMENT PROJECT OF BAC KAN SPONGE IRON FACTORY ...57 3.1... Structure of the thesis: the the

INTERNATIONAL EXECUTIVE MASTER OF BUSINESS ADMINISTRATION PROGRAM

N o v e m b e r , 2 0 1 2

To complete this thesis, I would like to send my honest thanks to:

- Associate Professor Dr Tran Van Binh, Institute of Economic management –Hanoi University of Science and Technology spent a lot of time and guided me bywhole hearted during the process of thesis research

- Respectfully thanks to Teachers of Paris Management University, Thai NguyenUniversity as well as Vietstar training Joint stock company for organizing coursesand directly training, communicate your precious and practical knowledge in twelvesubjects of the course

- Sincerely thanks to the management board of Material and complete equipmentExport and import corporation (MATEXIM) for their best supports and providingrelated information in the process of thesis research and complement

- Heartfelt thanks to members in the class IeMBA.b01 who are always willing toexchange and offer suggestions as well as help me in the studying course andcompleting this thesis

Respectfully thanks

Student

Dang Huu Ky

TABLE OF CONTENT

INTRODUCTION 1

1 Name of thesis: Analysis and evaluation on effects of “Bac Kan soft iron production factory” project 2

2 Reason of choosing this thesis: 2

3 Targets of the research 3

4 The method of research 3

5 Database for research 3

6 Structure of the thesis: the thesis includes 03 chapters and the introduction as follows: 4

Conclusion and suggestions: 4

1.2 Contents of the project feasibility study 5

1.2.1 Feasibility Study: 5

1.2.2 Nature and purpose of feasibility study 5

1.2.3 Major contents of feasibility study 6

1.3 Financial-economic analysis for investment projects 8

1.3.1 Determination of investment capital 8

1.3.2 Expectation of revenues and project costs 11

1.3.3 Determination of profit, loss, and cash flow of project 12

1.4 Sensitivity analysis 26

CHAPTER II 28

INTRODUCTION OF CONSTRUCTION INVESTMENT PROJECT “BAC KAN SPONGE IRON FACTORY” 28

2.1 About the Investor 28

2.1.1 Overview of Material and Complete Equipment Export-Import Corporation “Matexim” 28

2.1.2 Functional Task, activity areas .29

2.1.3 The organizational management structure 29

2.1.4 Production and business characteristics of the company 31

2.2 Introduction of Construction Investment Project “Bac Kan Sponge Iron Factory” 34

2.2.1 The necessity of investment 34

2.2.2 Investment purposes: 41

2.2.3 Research of project market 41

2.2.4 Capacity and product 45

2.2.5 Technology 46

2.2.6 Plan and place of factory 48

2.2.7 Labor organization 50

2.2.8 Total investment capital 53

CHAPTER III 57

ECONOMIC AND FINANCIAL BENEFIT ANALYSIS OF INVESTMENT PROJECT OF BAC KAN SPONGE IRON FACTORY 57

3.1 Total capital: 57

3.2 Source of capital: 57

3.3 Production plan: 57

3.3.1 Capacity and output 57

3.3.2 Demand for material 57

3.4 Production cost 60

3.5 Estimated project revenue 62

3.6 Interest and loan payment plan 63

3.7 Cash flow of project: 63

3.8 Economic- Financial analysis 64

3.9 Project scenario analysis: 65

CONCLUSION AND RECOMMENDATIONS 67

Reference documents 68

Vietnam - one underdeveloped agricultural country went through two big warswhich had pushed its economy to be lagged behind economically in comparisonwith the world’s After two years of independence (30/4/1975), Vietnam jointedinto the United Nations and officially became one member in the United Nations.Due to centrally – planed economic management model, Vietnam’s economy didnot developed during a long time then always stayed at the backward top of theworld

Recognizing this matter, until the sixth national party congress (1986) under theobjective view, our country chose economic development model in the direction ofsocialist republic oriented market instead of centrally – planned economicmanagement model In 1995, Vietnam participated into ASEAN and about elevenyears later continued to joint in WTO (2006), then became the 150th member ofWTO

During more last two decades, our economy has gained significant developments Breaking through since 2000 until now, the economy has grew at the annual average of 7,73% (source from Legatum Institute ( http://www.li.com ), belonged to the leading top of the continent Currently, Vietnam’s economy has overcome out of the poorest country top of the world with the income per capita of 1300$ However, it is still a great distance compared with countries in the same region such as Income per capita in Vietnam lagged behind about 51 years in comparison with Indonesia’s, about 95 years in comparison with Thailand’s and

158 years in comparison with Singapore’s (According to Sai gon times on 5.4.2012)

Based on student’s opinions, in order to shorten this distance, then besidedetermining proper national strategy, strict legal system not by the way of saving,but the only way for us is investment Only by investment, we can increase laboroutput, then innovate technologies, continually take fully advantages of nationalsources of the country (oil, mineral, mining, forestry, sea…) as well as createproducts meeting with higher and higher demands of people in general and

customer’s in particular The investment activities must come along with projectsmeanwhile for projects to be effective, then it must be objective in the process ofsetting up projects, we must analyze and evaluate carefully factors influencing onprojects and especially good project management In the scope of thesis, studentfocuses on researching and evaluating an important perspective of the project which

is “effects of the project”

1 Name of thesis: Analysis and evaluation on effects of “Bac Kan soft iron production factory” project

2 Reason of choosing this thesis:

According to the statistics of Investment and planning Ministry, annually Vietnamhas about 20.000 companies born out but about 30% of companies going tobankrupt during about 5 years Especially in some first months of 2012, there havebeen 50.000 companies going to bankrupt Some companies are step by stepdeveloping so much, but beside that there are many companies which are stillstaying stalled, produce moderately or go to be ruined… why?

In addition of strategy, market, capital source, objective reasons from macromanagement of the Government, one of main reasons leading to failures of thosecompanies is that effects of the project investment are low or loss The development

of companies and widely country’s economy, we must be straight to say that non investment means that companies are going to be ruined and absolutely theeconomy will not develop

-We can see that the core of the investment is to gain profit and offer jobs foremployees In order to gain profit, the research and studying works must be carefuland accurate There are some projects which are considered as high economicaleffective ones, but actually after being completed and going into operation, theyface to great losses What is reason? In my opinion, the main reason is that theanalysis of project’s effects is not right, provided data is not accurate In the factthat this issue happened to many real state projects, brick production factory,concrete production factory, mining projects

Material and complete equipment Export and import corporation (MATEXIM)

is one company operating in some traditional scopes such as trading, transportation,real estate However, now it was supplemented with completely new one which ismining and product manufacture from ore This scope was carried out by iron oreexploitation and investment projects and soft iron production factory in Bac Kan.This is one big and daring project of the company that decides survival and businessstrategies in long term for the company

In the scope of the thesis, I really expect to analyze and evaluate effects of BacKan soft iron production factory project under my knowledge trained in MBAcourse and researching results

3 Targets of the research

In this thesis, I took fully advantages of theories studied in MBA course,researching documents in order to analyze and evaluate as well as research factorsrelated to effects of the project, then propose solutions for the project to be moreeffective, limit risks for the company

4 The method of research

4.1 Methods used as follows:

- Research case study of Matexim Company and some other projects which havebeen operating in the northern area

- Make statistics and analysis on market, collect actual information, treat dataand use database of consulting services in the technical field

4.2 Offer conclusion based on the procedure: collect information – processinformation – estimate price of future market – offer solutions – find the mostoptimal solution - conclusion

5 Database for research

5.1 Use database studied in MBA course, especially project managementcourse, enterprise finance, strategic management

5.2 Use database from projects provided by Matexim Company, actual datafrom some projects of domestic and foreign factories

5.3 Data sources from professional organizations

5.4 Data researched on Internet under verified documents

6 Structure of the thesis: the thesis includes 03 chapters and the introduction

as follows:

INTRODUCTION

CHAPTER 1: Theory base on the project investment and analysis

CHAPTER 2: introduce about Bac Kan soft iron production factory project

CHAPTER 3: Analyze and evaluate economic – financial effects of Bac Kan softiron production factory project

Conclusion and suggestions:

Student’s thesis is one actual project which is being invested by Matexim Company.The research shows which key phase is leading to one effective project, which iskey phase leading to bad effective or non effective one for the investor to have moreviews on project’s future Our students expect to receive suggestions fromprofessors of the course and especially from Associate Professor Dr Tran VanBinh – the thesis instructor for the thesis to be better and be applied successfully inthe actual case

Respectfully thanks!

1.2 Contents of the project feasibility study

1.2.1 Feasibility Study: Is the last screening step to select the optimal project, this

stage is to confirm the investment opportunity feasible, solid, and effective or not?

In this step of study, the study content is similar to the pre-feasibility study stage,but they differ in more detailed and accurate level All aspects of the study areconsidered in the active state, i.e taking into account the uncertainties that canoccur on the contents of the study Considering the solidity of the project in terms

of the impact of the uncertainties, or it may have any impact measures is to ensureeffective project

1.2.2 Nature and purpose of feasibility study

Nature of feasibility study: In terms of form, the feasibility study document is a

collection of records presenting in a detailed and systematic manner the solidity andthe reality of a business production activity and the socio-economic development inthe aspects of market, technique, finance, organization, and socio-economicmanagement

In our country, the feasibility study is often called as the economic-technicalarguments The feasibility study is conducted based on the results of studies oninvestment opportunities and pre-feasibility study accepted by the competentauthorities At this stage of feasibility study, the project is drafted more carefully toensure that all expectation and calculation must be achieved at a high level ofaccuracy before submitting to planning, financial, and banking agencies and theinternational financial institutions for evaluation

Purpose of feasibility study: The feasibility study process is conducted in three

stages The stage of investment opportunity study is aimed at removingimmediately the clearly unfeasible projections despite of being without going intodetails The unfeasibility is demonstrated by statistics and easily findable materia leconomic information It helps to save time, and costs for the next studies

The purpose of feasibility study is to consider the last time to reach accurateconclusions about all the basics of the project through carefully calculated and

detailed statistics and techno-economic-technical schemes, schedules, and projectimplementation progress before formal investment decision.

All in all, the feasibility study is one of the tools to implement economic plans ofindustries, localities, and the country as a whole to turn plans into concrete actionsand bring socio-economic benefits to the country and the financial benefits toinvestors

1.2.3 Major contents of feasibility study:

The feasibility study is also known as establishment of investment projects Majorcontents of an investment project include micro-and macro-economic, technical,and management aspects These aspects in the projects of different industries havetheir own unique characteristics Therefore, the choice of fields for draftingtechnical description and project analysis will be a relatively complete model Thismodel can be used as a reference when drafting projects in other industries

* Major concrete contents of an investment project include the following issues:

- Considering the general economic situation related to the investment project:

It can be considered that the general economic situation is the basis of theinvestment project It represents the investment scenario directly affecting theprocess of development and financial economic efficiency of the investmentproject The general economic situation is mentioned in the project includes theissues as follows:

+ Natural geographical conditions (topography, climate, geology, etc.) related toselection and implementation of the project and upholding the efficiency of theproject in the future

+ Population and labor conditions related to the demand and consumption trendsand to the labor source provided to the project

+ Political situation, policies, and laws that affect the interest of investors

+ Socio-economic development situation of the country and localities and thebusiness production development of industries and units (GDP growth rate,

investment ratio on GDP, relationship between savings and consumption,GDP/capita, rate of business return, etc.) that affect the implementation process andthe promotion of the efficiency of the project.

+ Situation of foreign exchange (foreign exchange payment balance, foreignreserves, debt, and debt payment situation ) especially for projects importing rawmaterials and equipment

+ Economic systems and policies, including: Structure of business system byindustry, property relation, and region to assess the level and comparativeadvantages of the investment project; the policies for development, economicreforms, and restructuring in order to assess how favorable the level of awareness,thinking innovation, and environment for investment are

+ Status of national economic planning by period, level of detail, objectives,priorities, and impact tools from which to see the difficulties, advantages, andpriority that the project will be responded to as well as the limitations which theproject must comply

+ Situation of foreign trade and other relevant institutions, such as import andexport, import and export taxes, exchange rate policy, investment rules forforeigners, balance of trade, international balance of payments, etc These issues areparticularly important for projects producing goods for export and import of rawmaterials and machinery For example, the inappropriate exchange rate policy (thedomestic exchange rate against foreign currencies is low) will cause that the moreproduction is, the more export losses, and too high export taxes will causedifficulties in competing with goods from other countries in the overseas market.The investment rules have the effect of encouraging and attracting foreigninvestment

The facts and data to study the general economic situation of projects above can becollected easily in almanacs, statistical reports, magazines, books, and internationaleconomic materials

However, small projects do not need so many macro-economic data For largeprojects, it depends on the objectives, characteristics, and scope of the effects ofprojects to select in the general economic issues above the issues related to theprojects for review.

For all levels of project evaluation, macro-economic issues are considered not only

in the perspective of its impact on the projects, but also the projects’ impact on theeconomy at the macro perspective, such as socio-economic benefits brought by theprojects and the projects’ impact on the development of the economy and industriesfor economic structural reform and foreign-affair economic development, etc

- Market study:

Market is the decisive factor in selection of targets and scale of projects Even in thecase of projects having signed sole contracts, it must also study the markets wheresole agents sell their products and the reputation of the sole agents on these markets

The market study purposes are to determine:

+ The product supply-demand markets of or services of the current projects, thedevelopment potential of this market in the future, and the economic and non-economic factors affecting the demand for products or service

+ The promotional and marketing measures necessary to be able to boost the sale ofproducts of the projects (including pricing policies, organization, distribution,packaging, decoration, and advertising, etc.)

+ The competitiveness of the products compared to similar products available andproducts to be released in the future

1.3 Financial-economic analysis for investment projects

1.3.1 Determination of investment capital

* Determination of investment capital needs to be done each year and on the entireproject on the basis of the progress of the plan for proposed investment In the totalinvestment capital, it needs to separate groups:

- According to sources of capital: contribution or loans (short-term, medium-termand long-term with interest rate for each source)

- According to forms of capital: (Vietnam dong, foreign currencies), in kind, orother assets.

The total estimated investment capital of an project should be considered at eachstage of the investment process and determined in Vietnam dong, foreigncurrencies, in kind, or by other assets The total investment capital of the projectincludes the entire amount of capital needed to set up and put the project intooperation This total capital is split into two categories: Fixed capital and workingcapital

- Fixed capital consists of preparation costs and initial expenses of investments infixed assets These expenses are allocated to cost of products every year in the form

of depreciation

+ Preparation cost means the costs incurred before the investment projectimplementation Preparation cost includes: costs for establishment, project study,filing, submission, initial management (meetings, procedures, etc.), supplyarrangement relation, marketing, etc more Preparation cost is an amount difficult tocalculate accurately We must not miss the detailed items and the budget for thoseitems These costs need to be unanimously agreed by the parties to invest

+ Initial cost of investment in fixed assets includes the original costs of land, cost ofequipment, means of transport, and cost of technology transfer need to be certified

by the competent authorities and in accordance with the regulations of Ministry ofFinance

- Working capital is the amount needed to be spent on certain investments in anumber of items to make it convenient for the business of the project Workingcapital needs to be determined for each year and for each specific component.Working capital of the project is usually determined by the formula:

Working Capital = CB + AR - AP + AI

In which:

CB: Cash balance AR: Amount of receivables

AP: Amount of payables AI: Amount of inventory

Table of capital estimation

1 Cash balance (CB)

2 Amount receivables (AR)

3 Amount payables (AP)

4 Amount of inventory (AI)Total working capital (1 + 2 – 3 + 4)

* Determination of capital sources for the project and the ability to secure capitalfrom each source in terms of quantity and progress

Table of capital structure

Item

Capitalcost(Return ofcapital)

Construction stage Production stage

Totalcapital(Atcurrentprice)

Year 1 Year 2

- Year 1 Year 2

1.3.2 Expectation of revenues and project costs

1.3.2.1 Estimation of annual turnover of project

Expectation of annual turnover of the project helps estimate the partial results of theproject activities, and it is an important premise to predict the benefit and determinethe cash flow scale of the project in the future Project revenue is mainly sales fromthe volume of products or services created by the project and expected to supply themarket corresponding to each period during the project life cycle

To estimate the annual revenue of the project, it needs to estimate the basicparameters of design capacity, annual mobilization capacity, annual inventoryproduction, and unit price of product as well as the change of prices in the future

Turnover = Sales volume * unit price of products

In particular, consumption in each year is determined by the formula:

+

period-beginninginventories offinished goods

Or calculated by the formula:

Consumption inperiod

=

production inperiod

-Difference ininventories offinishedproducts

1.3.2.2 Estimation of annual costs of project

To meet the business needs of the project and create the corresponding revenue, theproject must consume certain costs The costs related to the production-businessactivities of the project include the direct costs, administrative costs, and costs ofsales

- Direct costs: Mean the basis for pricing production and cost of goods sold and

the basis for determining profit-and-loss results in the operation years of the project.Direct production costs include: direct cost of materials, direct costs of labor, andgeneral production costs

- Management costs: Include costs of business management and administration andother general costs associated with all activities of the project, such as salaries andallowances for the board of directors and project management personnel,depreciation of project stationeries, guest reception, and a part of businessmanagement costs allocated to the project at an appropriate rate

- Costs of sales: Consist of costs expected to be incurred during the sale of goods or

services of the project including salaries and allowances paid to sales staff and costs

of marketing, advertising, and packaging, etc These costs are often estimated at anappropriate rate by revenue or costs of the project

1.3.3 Determination of profit, loss, and cash flow of project

1.3.3.1 Tabulation of project basic parameters

The systematic presentation of the basic financial parameters of the project helpsinvestors and other stakeholders visualize the context of the project, identify whatinformation is important to collect and review during the process of projectpreparation and evaluation as a basis for making investment decisions accordingly.The table of parameters is usually classified into five main groups: investmentcapital group, financing group, revenue group, cost group, and other parametergroup for the project analyzer to easily find information

Based on basic financial parameters, investment plans, and operational plans of theproject, the construction of financial planning tables is carried out to serve for thedetermination of the value of future cash flows for the project

The financial analysis should be carried out using Microsoft Excel software becausethis software allows us to perform calculations from simple to complex Inparticular, the tools like Goalseek, Table, Scenarios, Crystal ball will help us tomake a lot of advances in analysis of sensitivity and simulation In addition, Excel

is retrofitted with financial functions like IRR(), PV(), NPV(), PMT(), etc allows us

to save calculating time with high degree of accuracy

1.3.3.2 Construction of expected financial statements for each year of operation or each stage of project life.

It needs to tabulate costs of production or services, revenues, profit and loss,estimation of accounting balance, revenue and expenditure balance The financialstatements help investors see the financial situation of the project, and it is thesource of data that helps calculation and analysis of targets reflect the financial side

of the project

1.3.3.2.1 Financial instruments used to analyze project cash flow

Study of the basic parameters of the project is used in the stage of projectidentification study, i.e during the formation or drafting of the project when it islooking forward to repairing the main economic and technical features of theproject This is only the general financial analysis The next step is to performdetailed financial analysis This work is usually done at the end of the feasibilitystudy stage or during the study to evaluate the efficiency of the project Thus, in allcases, performance of general financial analysis allows saving considerable time forpreparation of detailed financial analysis

To move from general financial analysis to detailed financial information analysis,the use of financial instruments is needed They are the tables of financial plan forthe project

- Table of investment plan

A table of investment plan shows the total investment and capital structure Totalinvestment capital includes fixed capital, working capital, and interest of loanduring construction (if any) Based on this table, it will show how the progress ofcapital allocation and portfolio of assets are from which to set the basis forcalculating the annual depreciation for the project To calculate, we can tabulate bythe following form:

Table of investment plan

Item Construction stage Production stage

Totalcapital(Atcurrent

Year 1 Year 2

- Year 1 Year 2

There are many methods for determination of depreciation value, but whenanalyzing annual depreciation for fixed assets invested in the projects, it is common

to apply the straight-line depreciation method The annual residual depreciationvalue in the table of investment plan will be calculated by taking historical costminus accumulated depreciation and plus new investment value (if any)

Table of depreciation plan

Accumulated depreciation

New investment

Residual value at the end of period

For investment projects having a variety of assets with different useful lives, eachtype of fixed assets should be made a separate table of depreciation plan thenaggregated into one general table of depreciation plan for all types of assets Based

on this table of depreciation plan, we will know how much the annual depreciation

is and how much the remaining undepreciated value of the assets is at the end of theproject

- Repayment plan

For an investment project, financial cash flow only refers to loans and debtrepayment while ignoring the mobilized stock capital and repayment of dividends toshareholders Therefore, the project financial cash flow analysis is a reasonable way

to help investors determine the date to mobilize loans and calculate financial costs

by interest and repayment of principal debt All these are reflected via therepayment plan of the project

Table repayment plan for principal debt and interest

The items in the table of repayment plan for principal debt and interest shall becalculated as follows:

(1) The debt increased reflects the time of the loans provided

Period-+

Interestincurred

in period

-Repaymentamount inperiod

+ Debtincreased

(3) Interest incurred in period is defined based on the period-beginning balancecorresponding to each period time

(4) This period-beginning balance is equal to the previous period-end balance.(5) The amount of repayment in period depends on the expected repayment planthat the investor agree with credit institutions

- Table of revenue estimation: Table of revenue estimation reflects the expected

income from product salability in the future operation of the project

Table of production and revenue estimation

- Table of cost expectation

Table of cost expectation reflects all costs incurred during the operation of theproject The costs are determined on the basis of consumption of inputs to producethe output level corresponding to an annual mobilization capacity of the project andexpected prices of these inputs on the market

Table of project cost expectation

- Table project profit and loss plan

Table project profit and loss plan is built to reflect in general the expectedperformance in each period (year, quarter, and month) throughout of the project'sfuture life In the simplest form, table project profit and loss plan is associated withtwo types of general terms: revenue and costs Revenue reflects the completion

level achieved from the project activities (sales and service revenue) Meanwhile,costs show the level of consumed effort (consumption of assets, costs for inputs,and financial costs) to generate corresponding revenue Finally, the two importantresults to be determined in table project profit and loss plan are profit (EBIT and netprofit) and the obligation to pay the annual corporate income tax In which,expected corporate income tax rate is one of the items needed to determine uponconstruction of project cash flow plan.

Table project profit and loss plan

Operating costs (subtracted)

Earnings before interest tax and loans payable

(EBIT)

Interest payable

Earnings before tax (EBT)

Corporate income tax (subtracted)

Profit after

* All reasonable costs are subtracted to calculate the taxable income:

- Depreciation of fixed assets

- Cost of raw materials, materials, fuel, energy, and goods

- Salaries, wages, and allowances

- Costs of scientific research, technology, innovation, improvement, health care,and labor training

- Costs of outsourced services.

- Payment of interest on loans for production and business

- Extraction of reserves

- Costs of consumption of goods and services

- Costs of advertising, marketing, and promotion

- Taxes, fees, charges, and land rent

Fees deducted when calculating income subject to corporate income tax:

- Export tax

- Input value-added tax on export goods and services

- Special consumption tax on domestic goods and services subject to specialconsumption tax

- Table of cash flow plan

Table of cash flow plan is a detailed presentation of all the actual revenues andexpenditures in cash from operations of business, investment, and funding of theproject with each time it arises There are two methods of planning cash flow:

* Direct method: Net cash flow from operations of business, investment, andfinancing activities of the project is determined by taking the cash inflow minus thecash outflow

* Indirect Method: Net cash flow from business operations to be adjusted fromprofit to net cash flow, and net cash flow from investment and financing activities isdetermined similarly to the direct method

Reasons to build table of cash flow plan for the project

- Expecting the future achievements of the project

- Considering the risks and how to make the project better.

1.3.3.2.2 Calculation of targets reflecting financial side of project

* Target to assess the financial strength of business

- Coefficient of equity against debt: This coefficient must be greater than or equal to

1 For promising projects with clear obtained efficiency, and if this coefficient may

be smaller than 1, about 2/3, the project is very favorable

- Share of equity in investment capital must be greater than or equal to 50% Forpromising projects with clear efficiency, the proportion may be 40%, and then theproject is favorable

- The ratio between current assets against current assets in debt

- The ratio between working capital and short-term debt

- The ratio between the total net profit and depreciation against payables due

Among the above targets, the 3rd one is applied only to projects of operatingenterprises, while the remaining four targets are applied to all projects The first twotargets reflect the financial resources to ensure that all projects are implementedsmoothly, and the following three targets refer to the ability to ensure payment offinancial liabilities

1.3.4 Assessment of project efficiency

- Target of net present value (Net Present Value - NPV): The net present value isthe total net profit of the whole life of the project discounted to current year at acertain discount rate

* Formula:

Or

Bi (Benefit) - Benefits of the project, i.e including all things the project achieves(such as sales, recovery fee, recovery liquidation value, etc.)

Ci (Cost) - Cost of the project, i.e including the all things project spends (such asinvestment costs, maintenance costs, repair costs, payment of tax, and interestpayments, etc.)

r P NPV

) 1 (

1 ) 1 (

1

n r

r r

r

G NPV

n n

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

r n

r

G NPV

)1(

1)1(

* Formula in Excel

Function NPV: NPV (rate, value1, value2, )

NPV of the project: Investment capital (year 0) + function NPV

In which:

rate: costs of using money or discount rate (usually banking interest rate)

value1, value2 .: amount of money earned for each period of the project lifecycle

* Assessment of NPV target:

- If the project has NPV greater than 0, the project is valuable financially

- If the project has a variety of plans conflicting each other, plan with the largest NPV is most valuable financially.

- If the project plans have the same benefits, the plan having minimum present cost value,

is valuable financially.

* Advantages and disadvantages of NPV target

- Advantages: Showing the scale of interest earned by the project life.

+ This target does not reflect the using efficiency of capital.

+ This target is only used to select the projects conflicting each other in case of the same life If lives are different, the selection based on this target will not make sense.

- Target of present annual value (Annual Value - AV): The present annual value is the net present value distributed evenly in the analysis period from 1 to n.

* Formula:

AV = NPV *

r(1+r) n (1+r) n – 1

* Assessment of Target AV:

- Any project that has larger AV is valuable financially.

- In the case of the projects conflicting each other, the project that has larger AV is the most valuable financially.

- If the projects have the same income, the project that has the smallest current annual cost (AVC) is the most valuable financially.

* Advantages and disadvantages of Target AV:

- Advantages: Able to be compared among projects with different life with different

additional investment times.

- Disadvantages: Calculation results depend on the selected discount rate to calculate and

also it does not reflect using efficiency of capital.

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

* Formula

* Assessment of Target B/C

If the project has Target B/C greater than or equal to 1, the project is financially efficient.

In the case of the projects conflicting each other, B/C is a standard to rank under the principle of higher ranking for projects having greater B/C.

- Internal rate of return (Internal Rate of Returns - IRR): This ratio is represented by interest rates that if you use it to convert the currency of the project, the present value of real income is equal to the present cost value.

* Formula

Or

In which:

Bi - income value (Benefits) in year i

Ci - cost value (Cost) in year i

n- operation time of the project

There are two main methods to calculate target IRR of the project

Interpolation method: Just select the high and low discount rate, for the two

corresponding values NPV: a negative and a positive value Then apply the formula:

2 1

1 1

2

1 ( )

NPV NPV

NPV r

r r IRR

In which: r 1 - discount rate for value NPV 1 > 0

r 2 - discount rate for value NPV 2 < 0

Geometric method: Similar to the idea of the above method, we present them on the

graph, use congruent triangles consequence (or algebraic method) to determine IRR =

r corresponding at NPV = 0.

Explanation: OI = IRR (discount rate r for NPV = 0)

Consider two congruent triangles:  ABI and  DCI, we have the equation:

BI OB OI BI BI CI

BI AB

CD

AB CI

BI CD

IRR (values) Values is the range containing values obtained over the period, equivalent to the range of value1, value2 in NPV function.

IRR reflects the maximum rate of interest that the project can withstand If you have loans with interest rates greater than IRR, the project has NPV less than zero, i.e loss.

There are two cases for calculation of recovery time They are recovery time not based on monetary value and recovery time based on monetary value The trend to use the method recovery time based on monetary value is higher because it reflects the real value of the currency.

Formula:

Co Tổng vốn đầu tư

NI + Khấu hao Thu nhập ròng + Khấu hao

F is the total fixed cost (fixed cost) of the project

v is the variable cost (variable cost) per unit of products and services

p is the unit price of products and services

Q 0 is the breakeven output

p v

F v p

F p p Q D

The formula is based on the case that the production offers a type of products and services.

If the production offers a variety of products and services, it needs additional calculation of each type of products and services.

* Assessment

NI + depreciation

Total investment Net income + depreciation

- The smaller breakeven point the project has, the smaller the possibility of loss is

- If the project has more plans, any plan with smaller breakeven point is more highly appreciated.

In fact, projects in different sectors have different capital investment structure, thus breakeven points are very different Therefore, the breakeven point is only considered for each specific project.

1.4 Sensitivity analysis

* Sensitivity analysis: An investment project often has a long life span However, the

calculation is based on assumptions Actually takes place not as assumed, so that the project cannot be certain Therefore, it needs analysis to know whether the project is certain not when there are adverse changes compared with the initial assumptions It is called as project sensitivity analysis e.

As a result, the sensitivity analysis is to analyze the relationship between the unsafe input quantities and output quantities.

* The unsafe input quantities are:

- Interest rate calculated in the project

- Sales of products and services

- Unit price of products and services

- Variable costs

- Period of project operation

* The affected output quantities are:

- Net present value (NPV)

- Internal rate of recovery (IRR)

- Capital recovery time with consideration of time factor of currency

- Breakeven point

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

* Sensitivity analysis steps:

- Determining major unsafe input quantities of the project

- Estimating likely changes in the value of these quantities

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

- Interpreting the results and their meanings.

CHAPTER II INTRODUCTION OF CONSTRUCTION INVESTMENT PROJECT “BAC KAN SPONGE IRON FACTORY”

2.1 About the Investor

2.1.1 Overview of Material and Complete Equipment Export-Import

Corporation “Matexim”

* History and development : Established on 17/09/1969; member of Engine &

Agricultural Machinery Corporation; member of the Vietnam Chamber ofCommerce and Industry; the founder member of Petrolimex corporation (PJICO),

To come through nearly 40 years operation, MATEXIM has been strivingcontinuously to consolidate and develop now MATEXIM has 10 member units ofthe company located in Hanoi city and other big cities of the three regions of theNorth-Central-South and Central Highlands The total annual turnover of thecompany reaches thousands billion VND, Export – Import turnover reaches 40-50millions USD/year, got billions VND/year from Export Encouragement Fund ofVietnam Ministry of Trade and Hanoi city People’s Committee From 01/7/2007formally transformed into join-stock company.



2.1.2 Functional Task, activity areas.


- Business in materials, machinery and complete equipment line, high-grade alloysteels, agricultural processing products, aquatic and sea processing products, etc.



- Business in industrial induction furnaces and steel production equipments such as:

- Business in tourism cars, specialized cars used for police, military, ambulance,other types of car



- Selling and doing after sale service products of Vietnam Engines andAgricultural machinery corporation (VEAM) server the agriculture, forestry and

- Purchasing all kinds of iron, steel, non- ferrous scraps to recycle, re-product for

- Organizing to drill reconnoiter and invest a technology line to exploit and processmineral ores especially iron ores at Ban Cuon – Cho Don –Bac Kan for producingpig-iron, steel and for export – import business



- Produce cast iron, cast steel, steel, non ferrous metals such as: tin, copper, lead,

-Producing and processing consumer products and plastic packaging, paperpackaging, wooden furniture, wooden fine-art products, etc for consumption andfor export; Electric cables, microbiology fertilizers, processing food for animals,aquaculture, electricity business, build the civil constructions and industrialinfrastructures and leveling, filling the land, installation electrical work from 110

KV or less

2.1.3 The organizational management structure

ORGANIZATION CHART OF MATEXIM COMPANY

BOARD OF DIRECTORS SUPERVISORY BOARD

GENERAL DIRECTOR

DEPUTY GENERALDIRECTOR

DEPUTY GENERALDIRECTOR

OFFICE

FINANCE-ACCOUN TING DEPT.

GENER AL TRADIN

G DEPT.

METAL DEPT.

TECHNI CAL MATER IALS DEPT.

CAR AND SPARE

PARTS TRADING

ENTERPRISE

SOUTHERN HANOI BRANCH

CENTRAL HIGHLANDS MATERIALS BRANCH

CENTRAL HIGHLANDS MATERIALS BRANCH

COMMERCIAL

SERVICE

ENTERPRISE

PRODUCTION AND SERVICE BUSINESS ENTERPRISE

HANOI GENERAL INVENTORY

MATEXIM BẮC KẠN BRANCH

HCM MATERIAL SBRANCH

DA NANG MATERIAS BRANCH

BAC KAN SPONGE IRON FACTORY

ORGANIZATION CHART OF MATEXIM COMPANY

BOARD OF DIRECTORS SUPERVISORY BOARD

GENERAL DIRECTOR

DEPUTY GENERALDIRECTOR

DEPUTY GENERALDIRECTOR

OFFICE

FINANCE-ACCOUN TING DEPT.

GENER AL TRADIN

G DEPT.

METAL DEPT.

TECHNI CAL MATER IALS DEPT.

CAR AND SPARE

PARTS TRADING

ENTERPRISE

SOUTHERN HANOI BRANCH

CENTRAL HIGHLANDS MATERIALS BRANCH

CENTRAL HIGHLANDS MATERIALS BRANCH

COMMERCIAL

SERVICE

ENTERPRISE

PRODUCTION AND SERVICE BUSINESS ENTERPRISE

HANOI GENERAL INVENTORY

MATEXIM BẮC KẠN BRANCH

HCM MATERIAL SBRANCH

DA NANG MATERIAS BRANCH

BAC KAN SPONGE IRON FACTORY

BAN CUON IRON MINES

BAN QUAN IRON MINES

2.1.4 Production and business characteristics of the company

2.1.4.1 The situation of production an business activities

With the total charter capital of the Company is 222 billion VND Over years, thecompany operates steadily on the three key areas of Sales, Manufacturing andService with the growth rate over 15% per year

The table of production and business operation in past three years

+ The leadership is united, passionate and qualified to manage the project

+ The core role and outstanding leadership of Chairman of Board of Directors cumDirector of the company

+ The management, staff of the project are fully experienced and qualified include:geological engineers, mining engineer, civil engineers, mechanical engineers, etc.and especially the experts manage the project

- Finance:

+ Healthy finance,no prolonged arrears

+ Steady growth and stability in the business

+ Sufficient capital to correspond to the project

+ Having the banks behind funding for the project in which are Bank forInvestement and Development – Thang Long Branch, The Vietnam DevelopmentBank, etc