Financial appraisal of investmenông thônproject in the exchange of maritime bank

53 CONTENT CONTENT 1 ACKNOWLEDGEMENT 6 PREFACE 7 CHAPTER 1 THEORETICAL FRAMEWORK OF INVESTMENT PROJECTS AND FINANCIAL APPRAISAL OF INVESTMENT PROJECTS 8 1 1 The appraisal of investment projects in the[.]

CONTENT 1

ACKNOWLEDGEMENT 6

PREFACE 7

CHAPTER 1: THEORETICAL FRAMEWORK OF INVESTMENT PROJECTS AND FINANCIAL APPRAISAL OF INVESTMENT PROJECTS .8 1.1 The appraisal of investment projects in the commercial banks 8

1.1.1 Investment projects 8

1.1.2 Investment project Appraisal 10

1.2 Financial Appraisal of investment Project 12

1.2.1 Definition of financial appraisal of investment project 12

1.2.2 Objectives of financial appraisal of investment projects 12

1.2.3 Content of project financial appraisal 13

1.3 Financial Appraisal Quality of investment projects at Commercial Banks 25

1.3.1 The concept of financial appraisal quality of investment project 25

1.3.2 Indicators of financial appraisal quality of investment projects 25

1.3.3 Factors influencing financial appraisal quality of investment projects .26

CHAPTER 2: FINANCIAL APPRAISAL OF INVESTMENT PROJECT IN THE EXCHANGE OF MARITIME BANK 28

2.1 Overview of Maritime Bank and the Exchange of Maritime Bank .28 2.1.1 Overview of Maritime Bank 28

2.2.2 Overview of the Exchange of Maritime Bank 29

2.2 The financial appraisal of investment project in the Exchange MB 35

2.2.1 Assessing the situation of investment project at the Exchange 352.2.2 The process of financial appraisal of investment project in the

Exchange MB 362.2.3 Content of financial appraisal of investment project at the Exchange

MB 372.2.4 Introduction to specific project 402.2.5 Quality of financial appraisal of investment project at MB 53

CHAPTER 3: SOLUTIONS TO IMPROVE AND COMPLETING THE

FINANCIAL APPRAISAL OF INVESTMENT PROJECTS IN THE

EXCHANGE OF MB 57

3.1 Orientation of the financial appraisal of investment projects at the

Exchange MB 57 3.2 Some measures to improve the quality of financial appraisal

investment projects at the Exchange MB 58

CONCLUSION 66

REFERENCES 67

LIST OF TABLES

Table 1 Developing process of Maritime Bank 30

Table 2 The process of financial appraisal of investment project in the Exchange of Maritime Bank………36

Table 3 Capital scale of stage 1 42

Table 4 One year expected raw material of the project 42

Table 5 Scale of project 44

Table 6 Total investment of the project 46

Table 7 Capital structure of the project 46

Table 8 WACC of the project 47

Table 9 Cash flow of the project 48

Table 10 Time debts can be paid 49

Table 11 DCRS 49

Table 12 Payment plan of medium-term loans 50

Table 13 Change in revenue affects NPV and IRR 51

Table 14 Change in investment capital affects NPV and IRR 52

Table 15 Current situation of medium-term loans 53

LIST OF FIGURES

Figure 1: Growth of number individual customers from 2011 to 2013 33

Figure 2: Loans for enterprises from 2011 to 2013 35

ABBREVIATION

I would like to express my profound gratitude to all people who haveenthusiastically supported me during the past two months Without their help, Iwould have not completed this thesis on time

I am deeply grateful to Dr.Nguyễn Thanh Hà, my supervisor, for his valuableguidance and great encouragement In addition, I would like to give my sincerethanks to Mr Nguyễn Minh Hùng –my mentor at Maritime Bank, who supported

me gather data as well as information that are necessary for the thesis during myinternship In addition, I am also truly thankful to the staff at Maritime Bank fortheir supports when I interned there

Once again, thank you all!

Nowadays, with the fast growing emerging economy, Viet Nam, one of thedeveloping countries in Asia area, becomes a potential market for project lending

In recent years, the rate of investment in our country’s economy has strong growth

to promote economic development and improve social life However, under theimpact of global economic crisis in 2011, this market has been risker Therefore,investment project appraisal activity, especially financial appraisal, is one of theprimary concern most commercial banks

This research concentrates on analyzing the investment project of Maritime Bank

in Hanoi City, points out the drawbacks and recommends the solution to enhancethe project It met its aims through a study of basic relevant literature frameworks

and a study of specific application at Maritime Bank “Financial appraisal of investment project in the Exchange of Maritime Bank”

Topic includes main contents following:

Chapter 1: Theoretical framework of investment projects and financial appraisal

of investment projects

Chapter 2: Financial appraisal of investment project in Maritime Bank

Chapter 3: Solutions to improve and completing the financial appraisal ofinvestment projects in Maritime Bank

Because the time is limited and I have not very much practical knowledge, I lookforward to receiving the help of supervisor to achieve better results

I sincerely thank!

CHAPTER 1: THEORETICAL FRAMEWORK OF INVESTMENT PROJECTS AND FINANCIAL APPRAISAL OF INVESTMENT

PROJECTS

1.1 The appraisal of investment projects in the commercial banks

1.1.1 Investment projects

a Definition of investment project

An investment project (or project) is a proposal for an investment, in which, aninvestment project is the expenditure of resources in the present, in order to benefits

in the future Each country or organization, based on its development strategy,might have different point of view about investment projects The following aresome of various definitions of investment projects:

In The Portable MBA in Project Management by Eric Verzuh, a project is atemporary venture, with a finite beginning and end, whose goal is to create a uniqueproduct or service

United Nations Industrial Development Organization (UNIDO) defines a project

as a proposal for an investment to create and or develop certain facilities in order toincrease the production of goods/services in a community certain period of time

In Viet Nam, according to Decree 52/1999 NC-CP, an investment project isdefined as a set of proposals on making initial investments to build, expand, orrenovate certain objects in order to increase quantity; maintain or improve thequantity of the product or certain services in a period of time

b Characteristics of investment projects

A type project has the following key characteristics:

1 Each project must have clear objective(s) The objective(s) answers the question:what will the investors and society get from IPs? Generally, an objective isquantified into specific performance indicators

2 Each project uses various types of resources such as human resources, etc.

However, all those resources are scarce, thus a project must be carried out within

the constraint of resources

3 Each project must have a fixed time frame, meaning that it must have a specific

beginning date and an end date The beginning date is when the project cycle

starts, and the end date is when the project cycle completes

4 Most of projects are medium-term and long-term projects As a result, projects

are considered risky for investors due to the uncertainties in the long run The

uncertainties might be change in social-economic conditions, interest rates,

government policies, and unexpected cash flows, etc

c Project cycle

The precise formulation of a project and its phases vary from one agency to

another, but a typical project normally includes the three main stages: project

preparation, project implementation and monitoring, and valuation

The first stage is project preparation

 Programming: the establishment of general guidelines and principles for

corporations, outlining of broad ideas for projects and programs

 Identification: within the program framework, problems, needs and interest

of possible stakeholders are analyzed; ideas for projects and other actions are

identified and screened The outcome of this phase is the decision of whether or not

the project is worth going ahead with the designing and detailed project document

Recently, investors place much emphasis on project identification as an important

element in the overall success of the project

 Preparation and analysis: this stage is formally a borrower responsibility It

involves creating a detailed plan Through careful and detailed analysis, projects are

likely to be shaped and redefined to take them a step closer to realistic conditions

under which they may be implemented

and analysis

Appraisal and investment decision

 Appraisal and investment decision: this is probably the best-known stage ofthe cycle, which is the responsibility and primary concern of the lender Its purpose

is to establish the worthiness of a prepared project in the light of its resourcecommitments Appraisal covers all aspects of the projects Making investmentdecision is the next step after appraising

 The second stage is implementation and monitoring.

The agreed resources are used to carry out the planned activities and achieveobjectives Implementation tends to be complicated in practice by many unforeseenproblems Flexibility is therefore required at this phase to enable the successfulexecution of this project The process of implementation can be long and drawn outdepending on the nature of the project and the time period over which is spans.While the project is being carried out, continuous monitoring is required to satisfyproject implement that things are proceeding according to plan

 The third stage is valuation

Once the project is completed, it needs to be evaluated so as to enable analysis(borrowers and lenders) to assess its performances and outcome Has the projectbeen successful in attaining its objectives? If not, in what respect has it failed? Howmight its design and implementation have been improved?

1.1.2 Investment project Appraisal

a Definition of investment project appraisal

Each project, before being carried out, must be appraised by many stakeholderssuch as government, investors, creditors, etc Based on the objectives of theappraisal each stakeholder perceives, the concept of appraisal varies For example,

to a project’ owner, appraisal is a means to assess whether an investment projectmeets the owners’ objective of generating profit To the bank offering project loan,

it views appraisal as a means to not only assess the profit potential of the project but

also the ability of debt payment But it is generally defined as systematic and

comprehensive review of basic factors which directly influence the investment in terms of implementing and generating profit.

In a project cycle, appraisal is one of the steps in project preparation, and it is animportant step in deciding whether to invest into one project or not From a bank’s

point of view, appraisal is also considered one of the most crucial activities beforemaking lending decisions.

b Content of investment project appraisal

The content of investment project appraisal includes six main aspects, in whichfive of them are non-financial, and the rest is financial aspect

 Non-financial aspects of project appraisal

 First, commercial aspect(sometimes market prospects) is the aspect which

covers all the commercial considerations and arrangements for procurement ofsupplies and the marketing of output

 Second, technical aspect considers a project’s supplies( inputs) and its

production( outputs), focuses on technical relations and aspects such asgeographical location of construction, production size and outputs of projects,technology and equipment, scale and methods of projects

 Third, institutional aspect (or organizational aspect) concerns for the

administration and management of projects The focus is on the institutional factorsand setting (e.g laws and regulations), communication networks, structures ofauthority and responsibility, etc

 Fourth, economic aspect addresses the project’s impact and its worthiness

from the viewpoint of the whole society It is different from financial analysis inthat it goes beyond the concerns of participating agents alone An economicappraisal considers not only the impact of a project on the organization sponsoringthe project, but also considers the external benefits and costs of the project for thegovernment agencies, private sector enterprises and individuals regardless ofwhether such impacts are matched by monetary payments or not

 Fifth, social and environmental aspect considers the project’s impact on and

implications for particular group and regions, gender implications, wider effect onthe health, culture, quality of life, and so on of those affected by it directly andindirectly

 Financial aspect of project appraisal

Financial appraisal is a method used to evaluate the viability of a proposedproject by assessing the value of net cash flows that result from its implementation

A financial appraisal essentially views investment decisions from the perspective oforganization undertaking the investment Thus, it measures only the direct effects

on the cash flows of the organization of an investment decision

1.2 Financial Appraisal of investment Project

This thesis focused on the financial appraisal of investment project In this part, Iwill go into more detail about definition, the objectives and contents of projectfinancial appraisal

1.2.1 Definition of financial appraisal of investment project

Financial appraisal is one of the most important aspects of project appraisal It is

a systematic, scientific and comprehensive review the financial indicators to ensurethe feasibility of a project

Normally, it will just be worthwhile carrying out a financial analysis if output ofthe project can be sold in the market, or otherwise valued in market prices

Financial analysis of a project is undertaken to assess whether it will becommercially profitable for the enterprise or not A private firm will undertake afinancial analysis of a potential investment in order to determine its impact on thefirm’s balance sheet Governments and international agencies will also routinelyundertake financial and economic analysis Banks implement financial appraisal onthe purpose of assessing not only the project’s profit prospect but also its ability topay off debts borrowed from Banks Financial appraisal support banks make themost accurate and appropriate decisions to earn profit while still keeping its capitalsafety

1.2.2 Objectives of financial appraisal of investment projects

From commercial banks’ point of view, financial appraisal of investment projectsplays an extremely important role in lending activity, particular in project lending.The broad objective of financial appraisal is to evaluate the financial feasibility ofprojects by calculating its cost benefit and using the result to set up projects’financial indicators and consider their effectiveness Specially, financial appraisal ofprojects is to:

 Make the right investment decisions: with financial appraisal, banks haveobjectively assessment of financial feasibility of investment projects Therefore theycan make loans to good client

 Create the benchmark to examine the use of capital in terms of purposes,subjects and methods

 Have firm evidence to calculate the effectiveness of projects, as well as theability of investment projects and the investors to generate profit to pay back theloans

 Consult investors to help them complete the project’s content: recognize andadd necessary methods of risk management for investors to enhance the feasibility

of the projects and reduce risks

 Based on appraisal result, appraisers will make decisions of the amount oflending, time of lending, debt- collection plans, etc

1.2.3 Content of project financial appraisal

Investment project appraisal helps commercial bank not only to evaluate theprojects’ effectiveness, but also to ensure the safety of capital loaned out by banks.Financial appraisal involves a number of approaches (which will be discussed lateron) to evaluate financial effectiveness and financial indicators of IPs Based on theresults of appraisal process, banks will decide whether to lend or not

Before going more detail about the content of financial appraisal, we shouldremember that one of the fundamental principles of financial appraisal is the timevalue of money An amount of money which has to be paid or earned today does nothave the same value as an amount of money which has to be paid or earnedtomorrow We need to convert all cash flows paid or received at different pints intime to a common reference point Banks often use the present time as referencepoint to be more readily understandable First, it allows for an easier comparison ofinvestment projects with different lengths of life Second, it is easier to compare theamount of money to be expended now to buy assets with the present value of streamcash flows

Here are the contents of financial appraisals:

a Total amount of investment capital, capital structure, and sources of investment capital

 Total investment capital

Appraisal of total investment capital is a important key in practice becauseinaccurate estimation leads to inadequately budgeting which negatively influencesthe financial effectiveness and the ability to pay off the debt of a project In fact, alot of investment projects defaulted due to the total capital invested rose far abovethe initial amount estimated In contrast, too high estimation of capital resulting in

high cost of debt decreases the profit generating ability of a project Therefore, arealistic approximation of total invested capital is a sound basic to calculate thefinancial effectiveness and the ability of a project to pay off the debt.

Total investment capital consists of all the costs involved in an investmentproject and ensure that the project is ready to be implemented

Investment capital includes three components: fixed capital, working capital andcapital provision

 Fixed capital

Fixed capital is that portion of the total capital that is invested in fixed assets(lands, buildings, vehicles and equipment) that stay with the business almostpermanently, or at the very least, for more than one accounting period Fixed capitalincludes preparation costs, pre-construction costs, implementation costs, and othercosts as follow:

- Preparation costs: investigating costs, building and appraising project costs

- Pre-construction costs: initial costs of land (compensation cost, cost toremove old constructions, legal fees, etc.); preparing and appraising cost ofdesigning, estimating, auction fees; costs of building tent, obtaining electricity andwater for construction

- Implementation costs: cost of building new structures or facilities, set upequipment; cost of purchasing equipment, transportation cost, maintaining cost;administrative cost; testing and commissioning of new facilities, financial cost andother costs during the implementation process

- Other costs

 Working capital

Working capital is the investment which is continually used and replenished inongoing operations It consists of operating expenses, raw material stock,inventories of finished goods or physical capital on hand

 Capital provision

Price fluctuations of raw materials, labor, equipment,… frequently occur in suchmarket economy like Viet Nam Moreover, there are a number of unexpected costssuch as repairing cost, cost of purchasing more inputs than planned As a result, it isnecessary to set up a provision for additional capital to deal with unexpectedproblems Commonly, capital provision accounts for a determined proportion (about5% to 10%) of the sum of fixed capital and working capital

In this stage of total investment estimation, appraisers have to evaluate theadequacy of total capital invested, the number of account items need to be of costssuch as fluctuating prices, inflation, additional volume of some items, or fluctuatingexchange rate in case the projects use foreign exchanges According to theexperiences of the bank through the similar projects, the appraisers will carefullyanalyze and investigate the causes of any big differences between the appraised aproject and its references; then propose an adequate capital structure to identifycredit limit the bank is willing to offer.

 Capital structure

Capital of an investment project can comprise of shareowners’ equity, debt, orthe combination of them Debt can be obtained from banks and other institutions or/and from issuing debt instruments

To ensure that a project will be implemented timely, as well as to avoid idlecapital, not only the amount of capital received, but also their time of deliveringshould be considered Those sources of expected capital must be ensured Next, acapital balance sheet must be created to compare the demand and the guaranteedsupply of capital If the supply is greater or equal to the demand, the project isaccepted Otherwise, the project is rejected or it must be decreased its size Thiscapital balance sheet is employed to program an allocating plan of capital, tocalculate interest and identify the time of debt payment

 Source of capital

Appraisers reexamine each kind of capital sources to assess the feasibility ofthose sources after the projected total invested capital being approved Appraisersmust balance the demand for capital and the certainty capital sources of a project toassess the feasibility of that capital’s budgeting

b Revenue, costs, profit and cash flows of an investment project

Total cost= total production cost+ administration cost+ marketing cost+ financingcost

 Profit

Annual profit of a project is calculated by the formula:

Profit before tax (EBIT) = total revenue- total cost+ other profit before tax

Corporate tax= profit before tax* tax (%)

Profit after tax= profit before tax- corporate tax

 Cash flows

 Definition of cash flows

Cash flows of a project are revenues and expenses which are expected to occur atdifferent points in time during the project

Net cash flow (NFC): NFC is the difference between annual cash inflows and cashout flows of the project

 Principles to identify cash flows

- Relevant cash flows: the relevant cash flow (incremental cash flow) for a project isthe additional free cash flow that the company can expect if it implements theproject It is the cash flow above and beyond what the company could expect if itdoes not implement the project

- Sunk costs: are the costs that has already occurred and hence not affected by thedecisions under consideration Since sunk costs are not incremental costs Theyshould not be included in the analysis

- Opportunity cost: are the cash flows that could be generated from an asset the firmalready owned Proposed that the firm owns a building that could be used for theproject or lease it If the firm’s manager decides to use this building for the project,the firm has to give up the opportunity to lease the building or sell it for cash In anutshell, opportunity costs should be included in the cash flows:

- Change in Net Operating Working Capital: the difference between the requiredincrease in operating current assets and the increase in operating current liabilities isthe change in NOWC If this change is positive, as it generally is for expansionprojects, then additional financing, over and above the cost of the fixed assets, will

be needed As these changes occur, the firm will receive cash inflows, and as theresult, the investment in net operating working capital will be returned by the end ofthe project’s life

- Effects on Other Parts of the Firm (Externalities): the effects a project has on theother part of the firm or on the environment Accepting one project can createcannibalization effect which new project reduces the firm’s current cash flows

- Overhead costs: are not directly related to any specific products or services of afirm Several examples are utilities costs (electricity, gas, water, ), administrativecosts Overhead costs are allocated to particular production units In the projectevaluation, however, the issue is not the allocation of overhead costs to productionunits, but the identification of incremental overhead costs Overhead costs oftenoccur whether or not the proposed project is accepted Thus, only incremental cashflows resulting from changes in overhead expenses are appropriate to be included inevaluating projects

 Cash flow calculation

Free cash flows (net cash flows)

FCF = Net operating profit after tax (NOPAT) – NET investment in operatingcapital

= [EBIT (1-t)+ Depreciation]- Net investment in operating capital+Depreciation)

However, a particular project ca be financed by owners’ equity, debt, lease or anycombination of those forms For each type of financing, therefore, it is necessary tohave some modifications in identifying cash flows

- Project entirely financed by owners’ equity:

FCF= Profit after tax+ Depreciation

- Project entirely financed by debts:

FCF= Profit after tax+ Depreciation – Annual principle payment

- Projects financed by equity and debts:

If debts are paid with fixed amount annually

FCF= Profit after tax+ Depreciation- Principle

If interests are paid annually and principle is paid in the final year

FCF= Profit after tax+ Depreciation

- Projects with fixed assets leased:

FCF= Profit after tax

Rs : Required rate of return on common stocks

Rf: Risk rate free

Β: stock’s beta coefficient

RM−Rf : Risk premium

 If the project is financed entirely by debts, the discount rate will be definedas:

Discount rate= after tax cost of debt= (1-T) Kd

Where:

T: Corporate tax ratio

Kd : Before tax cost of debt

 If the project is financed by both equity and debt, then the discount rate ofcash flows will be the weighted average cost of capital:

Discount rate= WACC= Wd∗(1−T )∗Kd+Ws∗Ks

Where:

Wd : weight of debt

Ws : weight of owners’ equity

Kd : before tax cost of debt

Ks: cost of equity

d Financial indicators

There are a lot of indicators to evaluate the financial aspect of a project.However, the following six indicators are the basic and most used ones: net presentvalue (NPV), internal rate of return (IRR), Profit index (PI), payback method,average accounting profit (AAP) and break-even point (BP)

 Net present value (NPV)

This is the most prominent method in financial appraisal This method is basedupon the discounted cash flow technique

Here are the steps in implementing this approach:

First, find the present value of each cash flow, including the initial cash flow,discounted at the project’s cost of capital

Second, sum the discounted cash flows This sum is project’s NPV

The equation for the NPV is as follows:

: Expected net cash flow at period 1

R: the project’s cost of capital, assumed to be constant

N: Life of the project

Cash out flows (expenditures such as the cost of buying equipment or buildingfactories) are treated as negative cash flows A project with only CF0 negative isjust one simple case In reality, there are numerous projects which have cashoutflows occurring several years before any cash inflows

NPV reflects the added value to the investors An NPV of zero signifies that theproject’s cash flows are exactly sufficient to repay the invested capital and toprovide the required rate of return on that capital If an NPV is positive, the projectgenerates more cash than is needed to service debt and to provide required rate ofreturn to shareholders In that case, the wealth of stockholders increases In contrast,

a project has negative NPV means that it generates loss to the shareholders

Only projects with positive NPV will be accepted If projects are mutuallyexclusive (i.e one project is taken on, the other must be rejected), we choose theproject having largest positive NPV If projects are independent, all with positiveNPV should be accepted

The most significant advantage of this method is that it takes into account thetime value of money, and it is useful for comparing similar projects with the samecost Nevertheless, it still has some drawbacks such as: it uses constant discountrate, but in fact, it may change over time due to social- economic changes; it doesnot calculate the profit in term of percentage, therefore, inconvenience forcomparing investment opportunities

 internal rate of return (IRR)

The IRR is the project’s expected return, defined as the discount rate that forcesthe NPV to equal zero:

NPV =∑

t=0

Without a calculator, we must solve IRR by trial and error For a realistic project,the trial-and-error method is a tedious, time-consuming task.

A project is accepted when it has IRR greater than required rate of return In thatcase, there is a surplus after paying for the capital, and this surplus will accrue to thefirm’s stockholders If projects are mutually exclusive, we must choose one with thehighest IRR which is above required rate of return

Using IRR enables investors to compare projects of differing value In contrast,the biggest disadvantage of this method rests on its constant discount rate IRR Thisassumption ignores the changes in opportunity cost of investors over time.Therefore, modified internal rate of return (MIRR) is used to avoid this limitation

Modified internal rate of return (MIRR) is a better indicator of relativeprofitability over IRR It is defined as follow:

COFt : Cash outflow at time t

CIFt : Cash inflow at time t

Payback period = n+ unrecovered cost at start of year/ cash flow during fullrecovery year

In which: n is the number of years prior to full recovery

Bank will accept projects with payback period being smaller than the timelimitation

This method owns the strength reducing risks due to certainty of cash flows inthe first years However, it contains three main weaknesses: 1 Dollars received indifferent yeas have the same weight; 2 Cash flows beyond the payback period aregiven no consideration regardless of its amount; 3 There is no relationship between

a given payback and maximum wealth of investors

- Discount payback period(DPP)

The discounted payback period is similar to pay back period method But DPP isdefined as the number of years required to recover the investment from discountednet cash flows

 Average accounting profit (AAP)

AAP=Total profit after tax or project/ n

In which: n is the number of years in a project’s life

The higher the AAP, the more wealth will be added to shareholders Appraisalofficers will choose the projects which has the highest one They often use NPV goalong with to get more accurate result

Qb : Quantity at break-even point

FC: Total fixed costs

AVC: Average variable costs

P: Sale price

Break-even point indicates how many goods and services the project shouldproduce to repay invested capital The project which has selling quantity exceedsbreak-even quantity will be accepted

e Risk analysis

Stand-alone risk, corporate risk and market risk are three types of project’s risks.Because of being the easier risk to estimate, we conduct to analyze project risky byestimating stand-alone risk and use it as a proxy for corporate risk and market one

A project’s stand-alone risk depends on the uncertainty inherent in its cash flows.The nature of individual cash flow distribution and their correlation with oneanother determine the nature of NPV (Or IRR) and thus the project’s stand-alonerisk There are 2 major techniques for analyzing a project’s stand- alone risk:sensitivity analysis and scenario analysis

 Sensitivity analysis

ΔXi : % change in input variable

This calculation is very meaningful to long-term projects because of increasinguncertainty Thus, appraisers conduct to calculate sensitivity of NPV(or IRR) tohave the appropriate change in costs of project However, sensitivity analysis is aquite simple method due it skips the probability of input changes and does not focus

on assessing the impact of all inputs on project at one time

 Scenario risk

By improving the limitations of sensitivity analysis, scenario risk allow us tochange more than one variable at a time.in this approach, financial analysts startwith the base case, or the most likely set of values for the input variables And then,they specify which is the best and the worst and their probabilities Base on thisscenario, financial analysts will calculate the expected NPV (or IRR), the standarddeviation of the NPV and the coefficient of variation

Besides providing useful information about a project’s stand-alone risk, scenariorisk still exist a drawback that just considers only a few discrete outcomes whilethere is an infinite number of possibilities

1.3 Financial Appraisal Quality of investment projects at Commercial Banks

1.3.1 The concept of financial appraisal quality of investment project

Financial appraisal quality of investment projects is the most effective to meetthe requirements of banks in lending decisions: improving the quality of loans, thetimeliness, costs and so on

After being appraised, one accepted project must have ability to timely repaydebt with the lowest risk Moreover, it must create benefits not only to the bank, butalso to the society If one accepted project is poorly appraised, leads to be unable torepay debt causing the bank to decrease profitability As a consequence, enhancingthe quality of financial appraisal is the task each bank should focus on.

1.3.2 Indicators of financial appraisal quality of investment projects

 Appraisal time: time spent on appraising must be adequate, meaning that it isneither too short nor too long If appraisal time is too short, appraisers might notpredict all the risk inherent in the project, thus, give poor appraisal results In thesituation of being too long, it causes waste of time and effort for the lending partyand difficulties for borrowers to finance so that they may be miss their businessopportunities

 Appraisal cost: should be minimized to save money for banks If appraisal istime-consuming and expensive, in despite of generating accurate results, the quality

of appraisal activity is considered poor

 Appraisal results: must help a bank’s office to consult investors in capitalbudgeting decisions, managing project’s effectiveness, and reducing project’s risks

 The quality of financial appraisal is also evaluated after the project finishes.The smaller the difference between appraisal results and reality, the higher thequality of appraising ability

 Lending amount and debt collecting amount: they reflect the and financialstrength of a bank A high and stable lending amount over years indicates thatbank’s quality of appraisal is high, so that bank is able to attract borrowing fromprojects’ investors In addition, timely repayment of principle and interest fromborrowers also prove a bank’s quality of appraisal

 Overdue debt and bad debt ratio: the lower these ratios are, the higher thequality of appraisal

1.3.3 Factors influencing financial appraisal quality of investment projects

a Subjective factors

 Human

Managers and appraisers are the key factors directly affecting on the quality of

project financial appraisal Financial appraisal of investment project is complexoperation that requires human are not only knowledgeable but also experienced andethical Financial appraisal is successful or not depends on decision of managersand appraisal Therefore, they should enhance knowledge, skills through practicalactivities, training program

 Financial Appraisal procedure

Financial appraisal procedure is the basis for appraisers to implement appraisingactivity A comprehensive and appropriate procedure will ensure the quality ofactivity Conversely, an inappropriate and flawed one will lead to wrong evaluation

 Technology

This factor has great impact on timing and the accuracy of financial appraisalresults With high and updated technology, collecting and processing informationbecome much easier and faster, thus banks can grasp more good investmentopportunities

to evaluate project Each project has a certain characteristic, thus it is not necessary

to calculate al the indicators for every project

When using method to evaluate financial appraisal, appraisers should deeplyunderstand its Pros and cons and to what extent they are suitable to a projectappraisal

 Task allocating

 Because a financial appraisal process includes many phases, task allocatinghas a strong impact on the quality of financial appraisal Clear and appropriate jobsfor the right people, at the right time along with tight control will definitely result inhigh quality of financial appraisal

b Objective factors

 Social –economic conditions

In an economy with stable and sustainable development, bank will be able toaccurately and timely forecast major changes in business environment

 Regulatory policies

In a favorable regulatory environment with clear, uniformed policies, it is easyfor banks to create specific regulatory and guidelines for banks’ staffs; if not bankswill face a lot of difficulties

CHAPTER 2 FINANCIAL APPRAISAL OF INVESTMENT PROJECT IN THE

EXCHANGE OF MARITIME BANK

2.1 Overview of Maritime Bank and the Exchange of Maritime Bank

2.1.1 Overview of Maritime Bank

- Name: Viet Nam Maritime Commercial Stock Bank

- Abbreviated names: MSB

- Trading name:

+ Ngân hàng TMCP Hàng Hải Việt Nam

+ Viet Nam Maritime Commercial Stock Bank

- Maritime Bank of Viet Nam (MSB) was formally established under the licensenumber on 08/06/1991 0001/ NH-GP of the State Bank of Viet Nam, on 12/07/1991Maritime Bank official launched and put into operation in the port city of HaiPhong, effective immediately after the Ordinance on Commercial Banks,Cooperative Credit and Finance Corporation

- The founding shareholders: the Viet Nam Maritime Bureau, General Post andTelecommunications Corporation of Viet Nam, the Civil Aviation Administration

2.2.2 Overview of the Exchange of Maritime Bank

a The information and development of the Exchange Maritime Bank

- Before 2005: the Head Office (including central administration and transaction)has location at the 5A Nguyen Tri Phuong, Hong Bang district, Hai Phong city.

- From 2005 to the present: the headquarters is located at 44 Nguyen Du, Ha BaTrung district, Ha Noi City

 Formation and development

Business area s of Maritime Bank includes currency trading activities, credit andfinancial services, monetary, banking which are specified in the license forestablishment and operation of Maritime Bank, a certificate of registrationenterprises and maritime business areas of Bank's currency trading activities,credit and financial services, monetary, banking are specified in the licensefor establishment and operation of the Maritime Bank, a certificate ofregistration enterprises and to comply with the provisions of the creditInstitutions act, the current provisions of law relating to customers in accordancewith the business strategy

Table 1 Developing process of Maritime Bank

2013 Capital: 8000 billion VND

Total assets: nearly 110 billion VNDNetwork operation: 216 transactions

Total officers and employees: 4200 people

2011 Change comprehensively business strategy, brand image, modern

operationCapital : 5000 billion VNDTotal assets: over 100 billion VNDNearly 140 transactions and 28 branches nationwideTotal officers and employees: 4699 people

2005 Regained stable condition after crisis in Asia and grew strongly in

The basic operations of the Exchange MB

- Capital mobilization short, medium and long term

- Receive capital investment trusts and development

- Short, medium and long term credit

- Discount Valuable papers

- Investment partnership involved in economic organization,

- Provide payment services domestic and foreign

- Trading in foreign exchange

- Commodity & trade finance

- Other banking services

b Result of operation and business of the Exchange MB in recent years.

In 2013, the world economic situations continued complicated fluctuations,declining commerce, low growth In Viet Nam, the implementation of tightmonetary policy to curb inflation is necessary, however, it entailed consequencesthat reduce domestic demand, a large inventory, enterprises met difficulties inproduction and business With banking and financial operations, it was the year thattotal system faced pressure to ensure solvency account, reducing interest rates,

credit growth in limited scale, write-offs and restructuring organizations to increasecompetitiveness.

 Main financial indicators

Under such conditions, the first bright spot in Maritime business’s activities in 2012was still maintained total operating income as equivalent to the previous year.Specifically, the total revenue from activities in the Maritime Bank was 2,619billion in 2013, up 9 % from last year , in which , net interest income was 2,009billion, up 29 % compared to 2012; gross margin was 17 % , up from 11 % theproportion of in 2012 These figures were the result of the initiative finding cheapersources of capital, reduce interest rates to obtain lower interest costs Besides, otherbusinesses of bank were profitable Particularly, net profit from foreign exchangetrading activities, buying and selling securities interest increased significantly,compared to last year despite continuing difficulty of market since 2011 In detail,profit from foreign exchange trading increased by 110 % to 88 billion, securitiesoperation got profit with amount of 100 billion dong

In terms of the criteria of scale, Maritime Bank still ensure good condition Totalassets was 109 923 billion, equivalent to 2011 56 % of which was used fromdeposits of economic entities and residents and bond issue Specifically, customerdeposits (including issuance of bonds) reached 61.881, in which amount wasmobilized from residents increased by 36 %, accounting for 54 % of total depositsfrom market This figure showed the stability in the capital structure of the Bank

In terms of credit, in 2013, credit growth of banking industry just got only 6-8 %due to very small could prove effective performance and repayment ability - animportant condition for loan from bank With current monetary policy and macro-economic situation, the credit growth was not feasible , even may lead to potentialrisks to the banking system In this context, with the motto Safety -Efficiency -Sustainable Maritime Bank had actively reducing excess loan, focus on improvingcredit quality On 31/12/2013, the Bank's total loans reached 28 943 billion Dong

Besides, with long -term strategic vision, Maritime Bank spent considerable budget

to invest in human resources capacity, technology development and productdevelopment Total