Investment project analysis the case of hai phong plastic factory project, the european plastic joint stock company

MASTER IN FINANCIAL MANAGEMENT Investment project analysis the case of Hai Phong Plastic Factory Project, the European Plastic Joint Stock Company Graduate student Nguyen Thi Thanh Mai Supervisor Asso[.]

MASTER IN FINANCIAL MANAGEMENT

Investment project analysis- the case of Hai Phong Plastic Factory Project, the European

Plastic Joint Stock Company

Graduate student: Nguyen Thi Thanh Mai Supervisor: Assoc.Prof.Dr Nguyen Van Dinh

Hanoi, 2022

University: Vietnam National University

Graduate School: International School

Date: December 2021 Degree: Master

Graduate Student: Nguyen Thi Thanh Mai Supervisor: Dr Nguyen Van Dinh

The process of integration with the economy of the region and the world has opened

up many challenges and opportunities for businesses, especially in investment projects Therefore, every business and investor need to improve the capacity and efficiency of investment project analysis to help businesses make the most optimal decisions and plans for their investment projects

The purpose of this thesis is to study the method of analyzing investment projects through several specific aspects affecting the results of project implementation such

as political and environmental factors and ways of book-based risk calculation (Long,

European Plastics Joint Stock Company (Europlast ) By quoting previous studies on investment projects and investment analysis, this thesis has summarized the concepts of investment and investment projects, investment analysis process and steps, financial and non-financial factors as

iii

well as risk management in investment projects From there, it is possible to give an overview of related concepts to apply the case study "analysis of Hai Phong plastic factory investment project" at Europlast

First, the thesis does qualitative and computational research, including key criteria such as NPV, IRR, WACC, CAPM, scenario analysis, sensitive analysis, and computer simulation Then this study examines non-financial factors through SWOT analysis of investment projects, applies the process of investment project analysis steps of (Ribeiro, 2010; Aaro J.Shenhar (2001) and uses PESTEL model questionnaire by Richardson, 2006; Shilei, L., & Yong, W., 2009; Katko, 2006) After being adopted and performing qualitative and quantitative analysis steps, the thesis has built a scale and measured through the observed variables of the project

"Hai Phong plastic factory"

From the research results, the thesis also raises the managerial implications to help improve the efficiency of investment project analysis This research result is beyond practical significance to suggest solutions to improve the investment project analysis process of enterprises (in particular, an overview of the actual situation of investment analysis of the "Hai Phong plastic factory" project) aims to help businesses make better investment decisions Besides, this is also a reference source for other studies, encouraging the implementation of similar studies in other business organizations

Key words: Europlast, European Plastic Joint Stock Company, Hai Phong plastic

factory, Investment project analysis, Capital budgeting method, scenario analysis, sensitive analysis, computer simulation, SWOT, PESTEL, financial analysis, non-financial analysis

iv

ACKNOWLEDGEMENT

First words, I would like to sincerely thank the teachers who are teaching at the International School, Vietnam National University, Hanoi, and the Postgraduate Section for their dedication to imparting knowledge, experience and supporting me throughout

my study at the school

I would also like to express my deep gratitude to my supervisor, Associate Professor Nguyen Van Dinh, who enthusiastically guided me in theory as well as practical implementation so that I could complete this thesis I am very grateful to him for always conscientiously following my thesis from the very beginning to its completion He has always been thorough and patient with a student with many shortcomings like me and let me know that knowledge is limitless and learning is never enough

Next, I would like to thank the MFM2019A class for always standing by my side, sharing documents, encouraging, and supporting each other during their study at the school During the process of writing this thesis, I have also received a lot of support from people around me The help not only from the working unit, the commanders who created favorable conditions for me to complete my studies at IS-VNU but also from my close friends who always support me in all aspects

Finally, thanks dad for your advice, thanks mom for your encouragement, and thanks to

my family for always loving and being by my side all the time

Wishing all of you, who have always accompanied me along this journey, always have good health and achieve much success in life Once again, I would like to express my sincere thanks!

Thank you!

Nguyen Thi Thanh Mai

v

TABLE OF CONTENTS

Table of Contents

ABSTRACT ii

ACKNOWLEDGEMENT iv

TABLE OF CONTENTS v

LIST OF FIGURES viii

LIST OF TABLES ix

ABBREVIATION x

INTRODUCTION xi

Chapter 1 Literature Review and theoretical background 1

1.1 Literature reviews 1

1.2 Theoritical background 2

1.2.1 Investment analysis concept 2

1.2.2 Steps of analyzing investment project 3

1.2.3 Project financial analysis 6

1.2.4 Project non- financial analysis 22

1.2.5 Factors affecting investment performance 27

1.2.6 Identified gaps 30

1.2.7 Analytical framework 30

Chapter 2 Research Methodology 32

2.1 Research approach 32

1.2 Research data 34

vi

2.2.1 Data source 34

2.2.2 Data collection 35

1.3 Survey 35

2.3.1 Target respondent 35

2.3.2 Sampling 36

2.4 Data analysis 36

Chapter 3 Analys 39

3.1 Overview of European Plastics Joint Stock Company 39

3.1.1 General introduction of European Plastic Joint Stock Company 39

3.1.2 Organizational structure of the company 42

3.1.3 Main performance indicators of European Plastics Joint Stock Company 45

3.2 Actual situation of investment analysis of the project "Hai Phong Plastic Factory" at European Plastics Joint Stock Company 51

3.2.1 Overview of Hai Phong plastic factory investment project 51

3.2.2 Investment project formulation process 52

3.2.3 Investment project analysis method that Europlast is using 55

3.3 Evaluation of investment project analysis activities at European Plastics Joint Stock Company 65

3.3.1 Strengths 66

3.3.2 Weaknesses and causes 67

Chapter 4 Proposed solutions and recommendations 70

4.1 Proposed solutions 70

vii

4.1.1 Business context analysis 70

4.1.2 Project risk analysis 77

4.2 Recommendations 82

4.2.1 Recommedations for project analysis 82

4.2.2 Other recommendations 88

CONCLUSIONS 92

REFERENCES 95

APPENDICES 100

Appendix 1: Cash flows projection 100

Appendix 2: Income statement 104

viii

LIST OF FIGURES

Figure 1-1 Steps of analyzing investment project 3

Figure 1-2 Factors affecting investment performance 28

Figure 1-3 Analytical framework of research 31

Figure 2-1 Research approach/steps 34

Figure 3-1 Organization chart at the production plant of Europlast 43

Figure 3-2 Number of employees of Europlast over the years 44

Figure 3-3 Competency of professional staff at Europlast 45

Figure 3-4 Implementation diagram of Europlast 's investment project preparation 54

Figure 4-1 Computer simulation analysis 82

Figure 4-2 Diagram of the organizational model of the formulation and analysis of investment projects 86

ix

LIST OF TABLES

Table 1-1 Compare the actual application of assessment methods 13

Table 1-2 Percentage of project appraisal methods that companies around the world are using

Table 1-3 Statistics on the percentage of small and medium-sized enterprises using investment project appraisal methods 15

Table 3-1 Main business indicators 2016 - 2019 47

Table 3-2 Overall assumption of business plan 58

Table 3-3 Capacity Scenarios 64

Table 3-4 NPV and IRR 65

Table 4-1 The combination PESTEL analysis and SWOT analysis 77

Table 4-2: Interviewee profile 80

Table 4-3 Questions of questionnaire 81

Table 4- 83

Table 4-5 Strengths, Weaknesses, Opportunities, and Threats indicators 85

Table 4-6 Sensitive matrix analysis 89

x

ABBREVIATION

IRR Internal rate of return

NPV Net present value

RRR Required rate of return

WACC Weighted average cost of capital

DCF

CAPM

Discounted cash flows method Capital asset pricing model

xi

INTRODUCTION

Plastic industry needs an average of 3.5 million tons of input materials such as PE, PP,

PS, etc, not to mention hundreds of different auxiliary chemicals every year; while the domestic capacity can only meet about 900,000 tons of raw materials and chemicals and additives for the needs of Vietnam's plastic industry However, the plastic industry is currently only active in about 20-25% of input materials as well as chemical additives, the rest must be completely imported, making the industry's production activities highly dependent on a source of raw materials and products from abroad Realizing the potential

of the engineering plastics industry, the European Plastics Joint Stock Company has planned to build a Hai Phong plastic factory to meet the needs of the market This thesis

is made to analyze this project, specifically to evaluate the feasibility of the project as well as to make suggestions to improve the company's project analysis method (which may include: financial and non-financial factors)

Investment project analysis is the examination and evaluation of economic and market trends, profit prospects, earnings ratios, and various indicators and factors to determine the right investment strategy Investment analysis will help businesses determine if an investment project is promising and should be implemented, besides, the process of analyzing a project also helps businesses learn many valuable lessons to apply to the current project or the next project of the business For European Plastics Joint Stock Company, analyzing the project "Hai Phong Plastic Factory" helps the company to recognize problems and perfect the investment project analysis process to make appropriate investment decisions as well as having timely solutions to their ongoing project Some of the problems that the company is facing can be mentioned as they do not use WACC to calculate the project's discount rate, but use a fixed interest rate of the

The objective of the study is to review the theoretical issues of analyzing investment projects at European Plastics Joint Stock Company and analyze the investment projects that have been established and implemented by this company On this basis, make judgments about the feasibility of the project as well as the merits and demerits, the limitations of the investment project analysis that the enterprise has prepared The scope

of this paper may not consider the effect of capital structure on the project due to limited information available Some recommendations for adjustment in project analysis compared to the project currently being prepared at the enterprise such as the need to survey more expert opinions, include more market analysis such as SWOT, PESTEL or SWOT matrix with PESTEL, use WACC to make discount rate in project analysis, analyze more closely the risks that businesses may face by sensitive analysis, computer simulation

xiii

III Research Scope:

Realizing that the technical plastic market is still quite open, European Plastics Joint Stock Company decided to invest in a plastic factory project in Hai Phong to increase production scale, expand the market and meet consumption demand of the market The project was established in 2019 and the expected completion date is in 2022 The scope

of the study includes internal and external factors of European Plastics Joint Stock Co

Is the project really necessary for the business?

What are the measures to manage and control project risks?

Introduction

Chapter 1: Theoretical background and Literature reviews

Chapter 2: Research Methodology

Chapter 4: Proposed solutions and recommendations

Conclusion

1.1 Literature reviews

With any investment, business, or construction project, there are risks involved However, construction projects are considered to have more inherent risks because of the involvement of many stakeholders such as contractors including main contractors and subcontractors, suppliers, investors, and banks Besides, the project is likely to be affected by external factors such as economic, political, social, technological, etc In Vietnam, there are also several project evaluation reports (Russia, 2014; Yen, 2009), focusing on analyzing some specific aspects affecting the project implementation results such as political factors and environment and how a company's book-based risk calculation affects the success of the project Research by Long, Stephen Ogunlana, Truong Quang, and Ka Chilama (2004) has pointed out five main problems that exist in construction projects in Vietnam such as incompetent designers/contractors, poor estimation and change management, social and technological issues, site-related issues, and improper techniques and tools In addition, in this study, WACC was also used to measure the discount rate Nguyen Trung Dong (2011), conducted a practical study on financial appraisal of investment projects from the perspective of an investor being a specific company in the plastic industry The project has verified the estimation of cash flow, cost of capital, methods used in the appraisal of investment projects at the Plastic

2

Phu Tho Company Vu Van Ninh (2011) used two empirical studies on project financial analysis, one from the viewpoint of an investor and the other from the viewpoint of a bank lending capital The essay then discusses the upsides and downsides of financial analysis in Vietnamese enterprises, particularly in the selection and application of discount rates Furthermore, Nguyen Thu Trang (2009) investigated the practical implementation of the project implementation strategy, which will be based on the effectiveness of risk management and risk allocation via the proper project structure According to Cano (1992), risk identification, assessment, strategy, and underlying processes must be clearly dependent on financial issues such as return on investment, market supply and demand, and risk analysis on market conditions In the paper by Behrens and Hawranek, it is pointed out that there are different financial valuation methods in the investment field, respectively: the "discounted rate method", which includes the net present value and the rate of return internal capital; the second includes payback period and simple rate of return; the third method calculates break-even point

appropriate criterion that can be used to plan projects as well as compare several economic proposals or projects from the point of view of Sobel et al (2009)

1.2 Theoritical background

1.2.1 Investment analysis concept

Investment analysis is the examination and evaluation of economic and market trends, profit prospects, earnings ratios, and various indicators and factors to determine the right investment strategy (Business) dictionary) According to Farragher (2007) divided Investment Analysis into three components: (i) Strategic planning, the foundation of the capital investment process, (ii) Capital budgeting methods, used to develop quantitative analysis, profit forecasting estimating investment returns, measuring and evaluating discounted cash flows, determine if the projects that the company is researching and

3

developing are worth pursuing, (iii) Risk analysis, identifying risks, controlling implementation and maintaining performance reviews regularly to prevent and convert risks as much as possible

1.2.2 Steps of analyzing investment project

These are the steps to analyze investment projects according to the framework of the World Bank The detailed content will be clarified right below Figure 2.1

Figure 1-1 Steps of analyzing investment project

(Source: Anand, 2002; Tuan; Rajaram, 2010)

1.2.2.1 Define criteria for evaluation

Determining project evaluation criteria is an extremely important first step that requires the participation and consensus of senior managers, the board of directors and other offices in establishing investment project This is considered as a guideline for investment projects as well as a basis for medium and long-term orientation for priority decisions of enterprises These criteria are considered as a measure, measuring the success of a project, an extremely important and necessary step

The success of the project is understood as the assurance of the set goals in terms of quality, schedule, budget, satisfaction of stakeholders etc Depending on different views and perspectives on the success of the project According to Globerson and Zwikael

Cost criteria: The investor needs to consider the ability to manage construction costs and the ability to meet the needs of the lowest possible cost for a construction work of standard quality (for example, one of the criteria of construction bidding is the lowest and only price but still ensures the quality and progress of the work) Furthermore, one of the budget allocation criteria is that IRR (internal rate of return) must be greater than RRR (required rate of return) or IRR greater than 15% of WACC (weighted average cost of capital) Investors must pay close attention (Graham & Harvey, 2001)

Quality criteria: Quality is one of the components contributing to "value for money" (Flanagan and Tate, 1997, the quality of the product or construction must

be durable, better and competitive with competitors in the market and must meet the required standards of quality and technique)

When a project meets 3 core criteria on time criteria, cost criteria, and quality criteria, this is a good project to consider for an implementation plan

1.2.2.2 Formal project appraisal

Project appraisal is the assessment of the overall viability of a project for an organization Evaluating the feasibility of a project should be evaluated on financial, technical, and non-financial factors Specifically, this non-financial aspect includes management roles, strategic impact and coordination with the rest of the organization, as well as related

5

social, political, environmental, and technical factors, and organizational issues, an important but often overlooked part of project appraisal (International Journal of Project Management, 1988) This is an essential step for management to make a decision on whether or not the project should be implemented by seeing that the project can generate net positive benefits, the project's indicators are better than the necessary criteria

1.2.2.3 Independent review

Using an independent assessment on a project is considered essential and practical to be able to assess the feasibility of the project (Mr.Aitor Perez, 2018) That helps to overcome the subjectivity of project preparation in case the project being prepared may have subjective views of investors such as underestimating costs and overestimating benefits over reality This independent review can be performed by third parties, consulting firms, who will remove subjective measurements and provide a thorough business plan

1.2.2.4 Project selection and budgeting

The budget and financial capacity of the company is one of the important parts that need

to be carefully considered during the appraisal of an investment project (Tuan; Rajaram, 2010) Choosing a good investment project and well managing the capital budget is considered the key to effective investment There is a two-way relationship between the selected project and the financial position and budget of the company in which the financial position and budget need to be combined to be able to carry out a complete investment project without any problems, for example, due to budget or funding shortages In addition, it is also necessary to regularly monitor, review and adjust the capital budget to suit some arising of the project such as additional costs that may be incurred to maintain and operate an existing investment; In this case, preparation for potential costs in the form of a safe-haven fund is suggested Expenses incurred in

6

investment projects and their sources of funds must be closely monitored by the CFO during the budget preparation phase (Broune, 2004)

1.2.3 Project financial analysis

Investors often use (i) simple payback period, (ii) discounted cash flow method with NPV, IRR, etc criteria This section examines in detail the formulation, applicability, and shortcomings of each method that is used to assess project feasibility

1.2.3.1 Capital budgeting criteria

Simple cash flow method and discounted cash flow method are the two main schools of capital budgeting method

The net present value (NPV)

The net present value of a project is the difference between the present value of the project's future net cash flows and the initial investment of the project NPV is used as one of the effective ways for capital budgeting and investment planning From there analyze the profitability of an expected investment or project In a nutshell, the NPV of

a project is the present value of the expected future cash flows less the project's initial

expected investment

In which:

NPV: Net present value is the net profit of the project's life calculated to the beginning of year 0

: net cash flow year t

: the discount rate for the project

7

: project life cycle

It can be seen that, as the discount rate (r) of the project increases, the NPV of the project decreases This is because when (r) increases, the denominator in the above equation also increases, causing the price of cash flow to decrease

To apply the NPV criterion in project appraisal, it is suggested that the CFOs distinguish into two situations

First, in the case of an investment project that is economically independent of other investment projects, whether the project is accepted or abandoned is determined by whether the NPV is negative or positive The following is the method for calculating the numerical values after receiving the NPV:

When NPV =0, the income is just enough to cover the investment capital

When NPV < 0, the project is not profitable, should not invest in this project When NPV > 0, the project is profitable, should invest in this project Besides, the larger the NPV, the more secure the profit nature of the project

Second, there is a case to be made for choosing between mutually exclusive projects In many cases, a decision must be made between different projects that are mutually exclusive Acceptance of one of these projects necessitates the abandonment of the others When applying the NPV criterion to mutually exclusive projects, it is common for investors to reject the project with an NPV less than zero and select the project with the highest NPV

In practice, NPV is used in the first comparison step to evaluate, reject, or select projects Accepted projects must have an NPV greater than or equal to zero; the project with the highest NPV will be chosen The benefit of NPV is that it displays the total present value

of profit after fully paying the investment capital, which is considered the most important goal of an investment project However, NPV has some drawbacks, such as only showing

8

the total profit or loss of the project without knowing how much the project is profitable

To overcome this, when analyzing financial indicators, investors need to combine IRR analysis

As an additional note, it can be seen that NPV is negatively related to r (project discount rate) When r changes, the NPV also changes Specifically, when r increases, NPV decreases and vice versa As a result, investors must select the project's discount rate carefully

The internal rate of return (IRR)

The internal rate of return is abbreviated as IRR This is the business's profit rate, which

is used in the budgeting process to assess the effectiveness of business investment IRR

is also known as the effective rate of return on investment In calculation, the internal rate of return (IRR) is the project's discount rate r at which the project's present value of income equals the project's present value of costs In other words, it is the discount rate

at which the present value of the project's income equals the present value of the investment, and NPV = 0

The internal rate of return (IRR) is one of the most important indicators in the financial analysis of investment projects The actual rate of return on an investment is referred to

as the IRR When a project's actual rate of return (IRR) equals or exceeds the project's desired rate of return, it is accepted (discount rate)

When IRR = r, the project is profitable but just barely covers the costs In this case, the investor is not profitable

When IRR < r, the investment project loses

When IRR > r, the project pays off interest and is profitable

Furthermore, IRR can be used by investors to compare and select projects for investment The project with the higher IRR will be the more profitable investment project on which the CEOs will base their investment decisions Typically, the project with the highest IRR is chosen for investment

Profitability index (PI)

Profitability index (PI), also known as benefit-cost ratio (B/C- Benefit-Cost Ratio), is the ratio of the present value of the project's cash flows to the present value of the initial investment

In which:

PV: present value of cash flow

I: initial investment capital

10

Projects are selected according to the following principles:

PI>1, the project is accepted For the case of mutually exclusive projects, investors are recommended to choose the project with the highest PI

PI<1, project is rejected

PI=1, the project is investable, depending on the investor

In fact, when applied to project analysis, PI has the same benefits and drawbacks as NPV NPV, on the other hand, is an absolute measure of the additional profit or wealth generated by a project, whereas PI is a relative measure of the return generated per dollar

of invested capital The PI indicator has the advantage of allowing investors to see how much profit the project generates per dollar invested This is extremely useful in prioritizing projects with limited capital budgets, which investors are unable to do based

on NPV criteria Investors can instead rank based on the standard return index PI Furthermore, unlike IRR, PI does not explain the difference in project size directly

The payback period (PP)

The payback period (PP) is the time it takes for the project's cash flow to cover the initial investment costs The payback threshold is another term for the required payback period Acceptance of projects is based on the payback time criterion, which states that the payback period must be less than or equal to the required payback time

The shorter the project's payback period, the less risk of capital recovery is avoided Furthermore, if the project has a very good NPV, IRR, and PI but the PP target exceeds the time limit, the project is invalid In practice, the PP criteria are carried out as follows First, investors must determine the required payback period, which is the maximum acceptable payback period for the project The required payback period cannot be longer than the project's technical or legal life Following that, if multiple projects are compared

Non-discounted payback period method:

In Which: n is the number of years for the project's cumulative cash flows to be < 0, but the cumulative cash flows will be positive when the n+1 year is reached

The no-discount payback method is simple, easy to use, and quick to calculate However, because this method ignores the profitable nature of money, its persuasiveness is limited

The discounted payback period (DPP)

Investors often prefer to use the discounted payback period method to overcome the disadvantages of the undiscounted payback period method The discounted return on investment r is the time required for the total present value of the investment to be equal

to the total present value of the investment

Discounted payback period is calculated in the same way as the non-discounted payback method, but on the basis of discounted cash flows The DPP method has the advantage

of being easy to determine with high confidence because the monetary value is properly reflected since DPP refers to the discount factor r Investors can rely on the DPP method

to find the break-even point in terms of present value, reflecting the true value of the investment's money Therefore, the DPP method is more convincing However, the DPP method also has weaknesses such as it does not reflect the total amount of income after

The accounting rate of return (ARR)

The accounting rate of return (ARR) indicates the expected percentage of return on an investment or asset relative to the original investment's cost ARR is a financial ratio used in capital budgeting The ARR is calculated by averaging the revenue from an asset for the company's initial investment to derive the rate or achievable return expected over the life of the asset or related project

The accounting rate of return is a useful budgeting metric for quickly calculating an investment's profitability ARR is primarily used to compare projects in order to determine the expected rate of return from each project, thereby assisting in investment

or property ownership decisions ARR has an impact on the project's annual cost or amortization cost Depreciation is an accounting convention that states that the cost of a fixed asset rises annually over the asset's life This allows businesses to profit from assets right away, even if they are only used for a year

The advantage of the ARR indicator is that it is easy to quickly calculate the profitability

of an investment However, this method is rarely used in practice analysis of investment

13

projects for the following reasons First, ARR ignores cash flows from investments This indicator is based on profit rather than cash flow Therefore, it can be affected by non-cash items such as bad debt and amortization when calculating profits A change in the depreciation method can be adjusted and lead to a higher profit The forward rate of return does not take into account the potential risks of long-term investment projects In addition, ARR ignores the time value of cash flows, or simply discounted cash flows That is, cash flows are discounted to the present from the future Meanwhile, the discounted cash flow theory states that the amount of money you have now will be worth more than the equivalent amount in the future

A review of literature over practices of capital budgeting methods

In the world, there have been many studies on assessing the feasibility of projects by capital budgeting method and testing the application of these methods in practice in different countries The results of some studies are summarized in the following table:

Table 1-1 Compare the actual application of assessment methods

Graham and Harvey (2001) The US and Canada 392 97% 75% 76% 57% 20% Brounen et al (2004) Germany 132 60% 48% 42% 50% 32%

Truong et, al (2008) Australia 77 92% 86% 64% 59% 19%

Kester et, al (1999) Singapore 54 82% 59% 70% 70% 44%

discounted cash flow, AB (accounting-based method): Method based on accounting basis

14

According to the table 1-1, most companies in countries around the world have applied the theory of capital budgeting methods into the practice of project appraisal The survey also shows that businesses frequently use the discounted cash flow (DCF) method, which takes into account the time value of money such as NPV or IRR or PI, which provides objectivity and high accuracy in assessing project feasibility as recommended by corporate finance theorists Accounting-based appraisal methods (eg, the average rate of return on invested capital- ARR) are rarely applied in practice

Table 1-2 Percentage of project appraisal methods that companies around the

world are using

15

Table 1-3 Statistics on the percentage of small and medium-sized enterprises

using investment project appraisal methods

Research, vol.11, no.3, pp.389-397

Research data of 214 small and medium enterprises in the world, with capital from 500,000 USD to 1,000,000 USD, has shown a big difference between small and medium enterprises compared with large enterprises in the use of criteria in the appraisal of investment projects (Runyon, 1983) From the above survey, it can be seen that, between small enterprises and large enterprises, there are differences in the use of appraisal standards Up to 70% of small and medium enterprises use the payback period (PP), only 14% use NPV and IRR methods, and 9% do not use any official standards, while the NPV and IRR methods are considered as project evaluation methods that 75% of large enterprises prefer to use

1.2.3.2 Project financial risk analysis methods

When doing capital budgeting, investors often calculate the expected future cash flow and then discount those numbers back to the present to get comparable results Investors

or CFOs are often based on various assumptions that contained specific errors in the processing of future cash flows In this section, three basic approaches to measuring these errors will be discussed

16

Sensitivity analysis

Sensitivity analysis is the analysis of the effects of uncertain factors (for example, MARR, cost interest rate, income, project life, etc.) and the possibility of overturning the conclusions about the alternatives It means from feasible to not feasible for the project and vice versa In other words, sensitivity analysis is looking at how "sensitive" the results are when there is a change in the value of one or more input parameters Sensitivity analysis can be particularly helpful in resolving uncertainties around project performance However, the shortcoming of the sensitivity analysis is that the model allows only one sensitive variable for a period of time while the fixed discount factors can be influenced by different factors at the same time such as leverage is changed, inflation effects, and systemic risk, so to evaluate investment performance more effectively, managers need to take into account all the circumstances that will affect the project

Scenario analysis

Scenario analysis is the process of estimating the expected value of a portfolio after a certain period of time, assuming that the value of securities or key elements of the portfolio changes, for example, as interest rates rise or fall Scenario analysis is commonly used to estimate changes to the value of a portfolio in response to an adverse event and can be used to test theoretical worst-case scenarios The technique of scenario analysis involves calculating different reinvestment rates for the expected return to be reinvested Based on mathematical and statistical principles, scenario analysis provides

a procedure for estimating the change in the value of a portfolio based on the occurrence

of different situations called "scenarios", following the "what if" analysis principles These assessments can be used to examine how the risk in a given investment is associated with a variety of potential events ranging from very likely to very unlikely Depending on the results of the analysis, an investor can determine if he or she can accept

17

the current level of risk One type of scenario analysis that specializes in worst-case scenario analysis is stability testing According to Hassani (2016), scenario analysis is the process of analyzing possible future events by considering alternative outcomes Scenario analysis overcomes the shortcoming of sensitivity analysis by allowing simultaneous changes in values for several key project variables, thereby building an alternative scenario for the project

Computer simulation

Computer simulation adds an aspect of dynamic analysis to project evaluation by generating random scenarios that match key project variables under the analyst's assumptions That helps to overcome the limitations of the two methods of sensitivity analysis and scenario analysis by the static and rather arbitrary in its nature (Brealey, 2000) If the version combines different scenarios, it still depends on the subjective perception of investors while the use of computer simulation is more objective in nature

to quantitatively describe the uncertainty surrounding a project's key variables as a probability distribution and to consistently calculate its possible impact on the project's

expected return

Regarding the applicability of these methods in practice, according to a survey by A Ryan (2012) when asking the directors of 1000 companies, 85.1% of CFOs always use sensitive analysis, analysis follow-up scenario analysis with 66.8%, while the simulation method has almost a third of companies often use it He also suggests that 75% of CFOs combine these methods to produce the final result Knowing how sensitive a project's value is to the capital budget input variables helps investors then have may decide whether any estimates need reconsideration or reconsideration of the investment proposal and whether any estimates are not worthy of further investigation before a decision to accept or reject the project Additionally, for projects that have been accepted,

18

sensitivity analysis can identify which variables may signal problems and need modification

1.2.3.3 Choices of discount factors

The choice of discount factor is consistent with the analyst's point of view This section provides some basic methods for quantifying the discount factor

Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital (WACC) is the cost of capital used by businesses based on the proportion of capital used by businesses including common shares, preferred shares, bonds, debt, etc It is also the rate a company is expected to pay on average to all its stockholders to finance its assets In other words, WACC represents the minimum return that a company must earn based on existing assets to satisfy its creditors, owners, and other providers of capital If the return is not satisfied, they may invest elsewhere (Fernandes, 2014) The enterprise's WACC is also known as the minimum required rate of return that the enterprise must achieve when deciding to undertake a certain expansion project or decide to acquire another business The WACC is used as

an appropriate discount rate for cash flows from projects with a similar level of risk to the enterprise If the project has a higher level of risk, the discount rate will require a higher rate corresponding to the risk level of that project and vice versa

19

D: Market price of corporate debt

V (=E+D): Total market value of the enterprise in terms of finance

Tc: The tax rate that the business needs to pay

E/V: The index represents the financial ratio based on the owner's capital

D/V: A representative index with a financial ratio based on the owner's debt The WACC theory is one of the most astounding in finance However, traditional WACC research necessitates large and rigid assumptions Furthermore, while the classical WACC is more general in practice than the academic model used at the time, the results are still unsatisfactory Many scholars, however, strongly support the use of the WACC method, and empirical evidence has been validated in a variety of cases Furthermore, Graham and Harvey argue, with the support of Liljeblom (2008), that WACC remains one of the best options for measuring the cost of capital

The capital asset pricing model (CAPM model)

The capital asset pricing model (CAPM) measures an asset's sensitivity to diversifiable risk (also known as systematic or market risk) that is often represented by

non-ected return and the expected return of a risk-free theoretical asset This model description describes the relationship between risk and expected return for an asset, in other words, the CAPM model is used to determine the theoretical required rate of return on equity The CAPM model was introduced by Jack Treynor (1961, 1962), [1] William F Sharpe (1964), John Lintner (1964a, b), and Jan Mossin (1966), building on the foundation of previous research Harry Markowitz's theory of diversification and modern portfolios was then further developed with two Fisher Black notes, known as the Black CAPM or zero-beta CAPM, and the Prefix three-factor model of Fama and French is the most popular model are being considered (Black, 1972; French; Fama, 1993)

: risk premium

Graham & Harvey conducted a survey in 2001, showing that CAPM is one of the most used tools in calculating the required rate of capital with 73% of CFOs using CAPM Welch's survey (2008) also found similar results that 3 out of 4 CFOs use CAPM to estimate the cost of capital in capital budgeting

Although CAPM is a fairly popular model, it also has many limitations in the study and

it is impossible to be sure that the prediction of CAPM is 100% accurate On the one hand, differences in project size or other factors may lead to different levels of risk, which is consistent with the analysis of Jagannathan (1998) This analysis suggests that small businesses are more likely to take a risk on labor income risk and that CEOs also perceive these firms to rely on a range of different risk factors and use CAPM less frequently or in other ways

21

The capital asset pricing model (CAPM) is still one of the most important innovations in portfolio theory and is widely used in practice, and many scholars support the idea of using dynamic CAPM to calculate the capital cost of a project (Graham & Harvey, 2001; Jagannathan, 1998)

1.2.3.4 Other notes on require rate of return

When applied in practice, most CFOs prefer to use WACC to calculate the fixed rate of debt and required rate of return on equity (Broune, 2004; Graham & Harvey; Harvey, 2001) WACC consists of two elements: a fixed rate of debt and the required rate of return on equity While fixed interest rates and required share rates are largely based on subjective models, large firms are thought to be more inclined to use risk-adjusted discount rates than small firms Besides, the survey of Brounen et al (2004) also show that large enterprises use CAPM rather than other alternatives

Practice shows that companies often use different ratios that apply to the project based

on the risk or nature of the project or the risk-based ratio of the department For most companies, the projects are of the same length, but the allocation of the required rate of return is different According to Graham's research, 8 out of 10 respondents indicated that the duration or length of the investment does not affect the required rate of return

To track stock price movements, companies often conduct revenue collection projects

so that a company can be viewed as a collection of current and future projects and complex alternatives to those projects In essence, the total value of the firm depends on how optimally they execute this project because the total corporate risk is seen as the sum of all the project risks (Mcdonald; Siegel, 1985) Even so, while CAPM works for stub projects, it doesn't work with the firm because of the existence of options Recognizing this problem, Berk (1999) constructs a model that separates firms and project betas and shows that CAPM can measure expected returns on all projects, but the expected return on the company's stock is not Based on this view, Dybvig (1982)

22

suggests that CAPM can successfully measure the expected return from projects but it does not correct for the ambiguous nature of actual choices Although the nature of these investments will ultimately be for companies, the systematic risk of companies varies depending on economic conditions, so their stock returns will do not reflect real project choices (Jagannathan, 1998) Therefore, CFOs should develop a set of required rates of return associated with the risky nature of the project that does not depend entirely on the CAPM because of its shortcomings

For each project investment a dynamic CAPM model should be used, as a result, the WACC, with the required return on equity as its principal component, also varies with the sensitivity of dividend returns (WACC, with the required rate of return on equity as its main component, also vary with the sensitivity of stock returns) That is why it is better and more practical for companies to use a dynamic and suitable set of WACC than using a static version of WACC

1.2.4 Project non- financial analysis

1.2.4.1 Business context analysis

The PESTEL model

The PESTEL model was first mentioned in the book "Scanning the Business Environment" published in 1967 by Professor Aguilar of Harvard University, this model

is known under the abbreviation "ETPS" and is considered the stepping stone to develop similar external environment analysis models Currently, most of the studies use the PESTEL model as a framework to analyze external environmental factors and monitor macro-environmental factors (external marketing environment) for business context analysis of the project in different fields Based on the analysis results, CEOs can make objective and accurate decisions for the marketing strategy or business strategy of the enterprise (Richardson, 2006; Shilei, L., & Yong, W., 2009; Katko, 2006)

23

The PESTLE model consists of the following six main elements:

Political Factors: Political factors greatly affect the business strategy of an enterprise because they can be a motivating factor, creating favorable conditions for the business

to develop or a barrier to the development of the enterprise or investment and business activities Political aspects that need to be prioritized for consideration include: trade policy, economic development policy, consumer protection policies imposed by the Government In addition, the political situation such as political institutions, existing political conflicts, some "sanctions" or "punishment" activities from political conflicts can also greatly affect Tax policies: export/import tax, consumption tax, income tax will also directly affect the revenue and profit of the business

Economic Factors: Economic factors such as economic growth, inflation and interest rates, economic stability, cost of goods and resources, unemployment policy, credit, etc directly affect the development situation of the enterprise Managers need to base on the analysis of the above factors to assess the overall economic situation to conclude which factors can affect the development of the business

Social Factors: All cultural and social factors of an area, a country will greatly affect the characteristics of consumption or the method of approaching customers

in that country At the same time, it is also important to pay attention to the changes in population, geography, culture, and society that directly affect products, services, markets, and consumers

Technological Factors: Technology is often identified as an essential element of

an organization as it is a useful tool for gaining an advantage in the marketplace Technological advancements can create new industries, and also provide valuable inputs to the service and manufacturing industries

The SWOT analysis

The SWOT analysis model was first known as the result of a research project conducted

by Stanford University, USA in the 1960s-1970s (the research team included economists Marion Dosher, Dr Otis Benepe, Albert Humphrey, Robert F Stewart, and Birger Lie) The research team surveyed more than 500 companies with the highest revenue voted by Fortune Magazine, to find out why many companies fail to implement their plans and deliver "SWOT analysis model" to understand the planning process of the business, find solutions to help leaders agree and continue to make planning, change the way of management The SWOT model was originally known as 'SOFT' which stands for the following words: S (Satisfactory) - O (Opportunity) - F (Fault) - T (Threat) - Bad things

in the future After this model was introduced to Urick and Orr in Zurich Switzerland (1964), they changed F (Fault) to W (Weakness) and SWOT was born from there The first version was tested and introduced to the public in 1966 based on research at the Erie Technological Corporation In 1973, SWOT was used at J W French Ltd and evolved from there In early 2004, SWOT was perfected and demonstrated its ability to effectively set and unify organizational goals without depending on consultants or other costly resources

25

SWOT analyzes the internal and external factors of the organization In which, strengths and weaknesses are factors that come from within the organization (or in the partnership related to the project being analyzed), while opportunities and threats are factors that exist outside the organization SWOT is known as a widely used tool in analysis and there are many variations from the traditional such as the SWOT matrix, the SWOT matrix, and PEST, the more detailed and complex the SWOT matrix and PESTEL are combined to produce the best possible analysis results Applying SWOT to all corporate investments is necessary to indicate which projects are selected in line with the company's goals and strategies as well as to clarify competitive advantages and project threats Through the SWOT analysis, managers will have a basis to make the best possible plan for the project or decide to choose an investment project

The combination of SWOT and PESTEL

The disadvantage of PESTLE analysis is that it only focuses on in-depth analysis of external factors that can affect the project or organization and ignores the internal factors

So if the manager planning a project only on PESTLE analysis will not see the strength

of the business or project to promote it or will not see the weakness of the project or business to plan overcome SWOT analysis considers both internal and external factors

of the business or project, it helps managers measure opportunities and potential threats However, when creating a SWOT diagram, a detailed and in-depth analysis of external factors is not done, at least not as clear and specific as analysis by the PESTEL model This can cause the business to ignore external factors that can bring benefits or risks from factors external to the project So a better approach is to be able to use the two models PESTLE and SWOT together as a matrix to objectively evaluate the project or company by performing extensive PESTEL analysis and using that result to analyze and assess opportunities-threats-strengths-weaknesses in SWOT analysis

26

1.2.4.2 Risk analysis

There is currently no unified definition of risk Different schools give different definitions of risk, but there are two main schools For the traditional school, the risk is considered unlucky, loss, danger, causing loss of property, or a decrease in actual return compared to expected return Risks are also understood as unforeseen uncertainties that occur in the business and production process of an enterprise, adversely affecting the existence and development of an enterprise According to the modern school, the risk is

a measurable uncertainty, both positive and negative, positive in that one can find preventive measures, limit negative risks, take opportunities that bring good results for the future

In finance, risk is defined as the risk of losing money or valuable assets In the context

of financial markets, risk is defined as the possibility of loss when trading or investing

So the risk is not the actual loss, but the amount that could be lost In the opinion of Harry Markowitz, investment risk is the change in return It is difficult to find a single definition of risk, rather it should be viewed as a subset of multiple adverse outcomes (Dutoit, 2004) Although there are many different definitions and classifications of risk, according to the agreement established among financial scholars, risk is divided into three main categories: market risk, operational risk and financial risk

Operational risk is caused by inadequate or erroneous internal procedures, human factors, system failures, or external factors causing financial loss The name operational risk was first mentioned in investment decisions, and the determination of compensation and rewards by Cristopher James (1996) For a project or business, knowing the risk well Operational risk can potentially reduce capital costs, agency costs, anticipated costs of financial distress, and political costs arising from management actions (Fontnouvelle, 2003)

27

Financial risk is any type of risk associated with finance, including financial transactions such as loans that cannot be repaid There are two typical risks that arise within the scope

of capital budgeting methods: Liquidity risk, the risk of an organization not being able

to meet its financial/funding commitment when they come due, and another type of risk such as counterparty risk is the risk of another party to a contract not meeting its financial obligations

1.2.5 Factors affecting investment performance