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Feasibility Study: Is the last screening step to select the optimal project, this stage is to confirm the investment opportunity feasible, solid, and effective or not?. Table of deprecia

INTERNATIONAL BUSINESS

MANAGEMENT ANALYSIS AND EVALUATION ON EFFECTS OF “BAC KAN SOFT

IRON PRODUCTION FACTORY”

PROJECT

TABLE OF CONTENT

INTRODUCTION 3

1 Name of thesis: Analysis and evaluation on effects of “Bac Kan soft iron production factory” project 4

2 Reason of choosing this thesis: 4

3 Targets of the research 4

4 The method of research 5

5 Database for research 5

6 Structure of the thesis: the thesis includes 03 chapters and the introduction as follows: .5

Conclusion and suggestions: 5

1.2 Contents of the project feasibility study 6

1.2.2 Nature and purpose of feasibility study 6

1.3 Financial-economic analysis for investment projects 9

1.3.1 Determination of investment capital 9

1.3.2 Expectation of revenues and project costs 11

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

1.4 Sensitivity analysis 24

CHAPTER II 26

INTRODUCTION OF CONSTRUCTION INVESTMENT PROJECT “BAC KAN SPONGE IRON FACTORY” 26

26

2.1 About the Investor 26

2.1.1 Overview of Material and Complete Equipment Export-Import Corporation “Matexim” 26

2.1.2 Functional Task, activity areas 27

2.1.3 The organizational management structure 27

2.1.4 Production and business characteristics of the company 28

2.2 Introduction of Construction Investment Project “Bac Kan Sponge Iron Factory”.31 2.2.1 The necessity of investment 31

2.2.2 Investment purposes: 37

2.2.3 Research of project market 38

2.2.4 Capacity and product 42

2.2.5 Technology 42

2.2.6 Plan and place of factory 44

2.2.7 Labor organization 46

CHAPTER III 52

ECONOMIC AND FINANCIAL BENEFIT ANALYSIS OF INVESTMENT PROJECT OF BAC KAN SPONGE IRON FACTORY 52

3.2 Source of capital: 52

3.3 Production plan: 52

3.5 Estimated project revenue 57

3.9 Project scenario analysis: 59

CONCLUSION AND RECOMMENDATIONS 61

Reference documents 62

Vietnam - one underdeveloped agricultural country went through two big wars which hadpushed its economy to be lagged behind economically in comparison with the world’s.After two years of independence (30/4/1975), Vietnam jointed into the United Nations andofficially became one member in the United Nations Due to centrally – planed economicmanagement model, Vietnam’s economy did not developed during a long time then alwaysstayed at the backward top of the world

Recognizing this matter, until the sixth national party congress (1986) under the objectiveview, our country chose economic development model in the direction of socialist republicoriented market instead of centrally – planned economic management model In 1995,Vietnam participated into ASEAN and about eleven years later continued to joint in WTO(2006), then became the 150th member of WTO

During more last two decades, our economy has gained significant developments Breaking through since 2000 until now, the economy has grew at the annual average of 7,73% (source from Legatum Institute ( http://www.li.com ), belonged to the leading top of the continent Currently, Vietnam’s economy has overcome out of the poorest country top of the world with the income per capita of 1300$ However, it is still a great distance compared with countries in the same region such as Income per capita in Vietnam lagged behind about 51 years in comparison with Indonesia’s, about 95 years in comparison with Thailand’s and 158 years in comparison with Singapore’s (According to Sai gon times on 5.4.2012)

Based on student’s opinions, in order to shorten this distance, then beside determiningproper national strategy, strict legal system not by the way of saving, but the only way for

us is investment Only by investment, we can increase labor output, then innovatetechnologies, continually take fully advantages of national sources of the country (oil,mineral, mining, forestry, sea…) as well as create products meeting with higher and higherdemands of people in general and customer’s in particular The investment activities mustcome along with projects meanwhile for projects to be effective, then it must be objective

in the process of setting up projects, we must analyze and evaluate carefully factorsinfluencing on projects and especially good project management In the scope of thesis,student focuses on researching and evaluating an important perspective of the projectwhich is “effects of the project”

1 Name of thesis: Analysis and evaluation on effects of

“Bac Kan soft iron production factory” project

2 Reason of choosing this thesis:

According to the statistics of Investment and planning Ministry, annually Vietnam hasabout 20.000 companies born out but about 30% of companies going to bankrupt duringabout 5 years Especially in some first months of 2012, there have been 50.000 companiesgoing to bankrupt Some companies are step by step developing so much, but beside thatthere are many companies which are still staying stalled, produce moderately or go to beruined… why?

In addition of strategy, market, capital source, objective reasons from macro management

of the Government, one of main reasons leading to failures of those companies is thateffects of the project investment are low or loss The development of companies andwidely country’s economy, we must be straight to say that non - investment means thatcompanies are going to be ruined and absolutely the economy will not develop

We can see that the core of the investment is to gain profit and offer jobs foremployees In order to gain profit, the research and studying works must be careful andaccurate There are some projects which are considered as high economical effective ones,but actually after being completed and going into operation, they face to great losses What

is reason? In my opinion, the main reason is that the analysis of project’s effects is notright, provided data is not accurate In the fact that this issue happened to many real stateprojects, brick production factory, concrete production factory, mining projects

Material and complete equipment Export and import corporation (MATEXIM) is onecompany operating in some traditional scopes such as trading, transportation, real estate.However, now it was supplemented with completely new one which is mining and productmanufacture from ore This scope was carried out by iron ore exploitation and investmentprojects and soft iron production factory in Bac Kan This is one big and daring project ofthe company that decides survival and business strategies in long term for the company

In the scope of the thesis, I really expect to analyze and evaluate effects of Bac Kansoft iron production factory project under my knowledge trained in MBA course andresearching results

3 Targets of the research

In this thesis, I took fully advantages of theories studied in MBA course, researchingdocuments in order to analyze and evaluate as well as research factors related to effects of

the project, then propose solutions for the project to be more effective, limit risks for thecompany

4 The method of research

4.1 Methods used as follows:

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

- Make statistics and analysis on market, collect actual information, treat data and usedatabase of consulting services in the technical field

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

5 Database for research

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

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

5.3 Data sources from professional organizations

5.4 Data researched on Internet under verified documents

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

INTRODUCTION

CHAPTER 1: Theory base on the project investment and analysis

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

CHAPTER 3: Analyze and evaluate economic – financial effects of Bac Kan soft ironproduction factory project

Conclusion and suggestions:

Student’s thesis is one actual project which is being invested by Matexim Company Theresearch shows which key phase is leading to one effective project, which is key phaseleading to bad effective or non effective one for the investor to have more views onproject’s future Our students expect to receive suggestions from professors of the courseand especially from Associate Professor Dr Tran Van Binh – the thesis instructor for thethesis to be better and be applied successfully in the actual case

Respectfully thanks!

1.2 Contents of the project feasibility study

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

this stage is to confirm the investment opportunity feasible, solid, and effective or not? Inthis step of study, the study content is similar to the pre-feasibility study stage, but theydiffer in more detailed and accurate level All aspects of the study are considered in theactive state, i.e taking into account the uncertainties that can occur on the contents of thestudy Considering the solidity of the project in terms of the impact of the uncertainties, or

it may have any impact measures is to ensure effective project

1.2.2 Nature and purpose of feasibility study

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

of records presenting in a detailed and systematic manner the solidity and the reality of abusiness production activity and the socio-economic development in the aspects of market,technique, finance, organization, and socio-economic management

In our country, the feasibility study is often called as the economic-technical arguments.The feasibility study is conducted based on the results of studies on investmentopportunities and pre-feasibility study accepted by the competent authorities At this stage

of feasibility study, the project is drafted more carefully to ensure that all expectation andcalculation must be achieved at a high level of accuracy before submitting to planning,financial, and banking agencies and the international financial institutions for evaluation

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

The stage of investment opportunity study is aimed at removing immediately the clearlyunfeasible projections despite of being without going into details The unfeasibility isdemonstrated by statistics and easily findable material economic information It helps tosave time, and costs for the next studies

The purpose of feasibility study is to consider the last time to reach accurate conclusionsabout all the basics of the project through carefully calculated and detailed statistics andtechno-economic-technical schemes, schedules, and project implementation progressbefore formal investment decision

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

1.2.3 Major contents of feasibility study:

The feasibility study is also known as establishment of investment projects Major contents

of an investment project include micro-and macro-economic, technical, and managementaspects These aspects in the projects of different industries have their own uniquecharacteristics Therefore, the choice of fields for drafting technical description and projectanalysis will be a relatively complete model This model can be used as a reference whendrafting projects in other industries

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

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

It can be considered that the general economic situation is the basis of the investmentproject It represents the investment scenario directly affecting the process of developmentand financial economic efficiency of the investment project The general economicsituation is mentioned in the project includes the issues as follows:

+ Natural geographical conditions (topography, climate, geology, etc.) related to selectionand implementation of the project and upholding the efficiency of the project in the future.+ Population and labor conditions related to the demand and consumption trends and to thelabor source provided to the project

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

+ Socio-economic development situation of the country and localities and the businessproduction development of industries and units (GDP growth rate, investment ratio onGDP, relationship between savings and consumption, GDP/capita, rate of business return,etc.) that affect the implementation process and the promotion of the efficiency of theproject

+ Situation of foreign exchange (foreign exchange payment balance, foreign reserves, debt,and debt payment situation ) especially for projects importing raw materials andequipment

+ Economic systems and policies, including: Structure of business system by industry,property relation, and region to assess the level and comparative advantages of theinvestment project; the policies for development, economic reforms, and restructuring inorder to assess how favorable the level of awareness, thinking innovation, and environmentfor investment are

+ Status of national economic planning by period, level of detail, objectives, priorities, andimpact tools from which to see the difficulties, advantages, and priority that the project will

be responded to as well as the limitations which the project must comply

+ Situation of foreign trade and other relevant institutions, such as import and export,import and export taxes, exchange rate policy, investment rules for foreigners, balance oftrade, international balance of payments, etc These issues are particularly important forprojects producing goods for export and import of raw materials and machinery Forexample, the inappropriate exchange rate policy (the domestic exchange rate againstforeign currencies is low) will cause that the more production is, the more export losses,and too high export taxes will cause difficulties in competing with goods from othercountries in the overseas market The investment rules have the effect of encouraging andattracting foreign investment

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

However, small projects do not need so many macro-economic data For large projects, itdepends on the objectives, characteristics, and scope of the effects of projects to select inthe general economic issues above the issues related to the projects for review

For all levels of project evaluation, macro-economic issues are considered not only in theperspective of its impact on the projects, but also the projects’ impact on the economy atthe macro perspective, such as socio-economic benefits brought by the projects and theprojects’ impact on the development of the economy and industries for economic structuralreform and foreign-affair economic development, etc

- Market study:

Market is the decisive factor in selection of targets and scale of projects Even in the case

of projects having signed sole contracts, it must also study the markets where sole agentssell their products and the reputation of the sole agents on these markets

The market study purposes are to determine:

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

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

+ The competitiveness of the products compared to similar products available and products

to be released in the future

1.3 Financial-economic analysis for investment projects 1.3.1 Determination of investment capital

* Determination of investment capital needs to be done each year and on the entire project

on the basis of the progress of the plan for proposed investment In the total investmentcapital, it needs to separate groups:

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

- According to forms of capital: (Vietnam dong, foreign currencies), in kind, or otherassets

The total estimated investment capital of an project should be considered at each stage ofthe investment process and determined in Vietnam dong, foreign currencies, in kind, or byother assets The total investment capital of the project includes the entire amount ofcapital needed to set up and put the project into operation This total capital is split into twocategories: Fixed capital and working capital

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

+ Preparation cost means the costs incurred before the investment project implementation.Preparation cost includes: costs for establishment, project study, filing, submission, initialmanagement (meetings, procedures, etc.), supply arrangement relation, marketing, etc.more Preparation cost is an amount difficult to calculate accurately We must not miss thedetailed items and the budget for those items These costs need to be unanimously agreed

by the parties to invest

+ Initial cost of investment in fixed assets includes the original costs of land, cost ofequipment, means of transport, and cost of technology transfer need to be certified by thecompetent authorities and in accordance with the regulations of Ministry of Finance

- Working capital is the amount needed to be spent on certain investments in a number ofitems to make it convenient for the business of the project Working capital needs to bedetermined for each year and for each specific component Working capital of the project isusually determined by the formula:

1 Cash balance (CB)

2 Amount receivables (AR)

3 Amount payables (AP)

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

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

Table of capital structure

Item

Capitalcost(Return ofcapital)

Construction stage Production stage

Totalcapital(Atcurrentprice)Year 1 Year 2 -

Year 1 Year 2

+ Loan,

1.3.2 Expectation of revenues and project costs

1.3.2.1 Estimation of annual turnover of project

Expectation of annual turnover of the project helps estimate the partial results of theproject activities, and it is an important premise to predict the benefit and determine thecash flow scale of the project in the future Project revenue is mainly sales from thevolume of products or services created by the project and expected to supply the marketcorresponding to each period during the project life cycle

To estimate the annual revenue of the project, it needs to estimate the basic parameters ofdesign capacity, annual mobilization capacity, annual inventory production, and unit price

of product as well as the change of prices in the future

Turnover = Sales volume * unit price of products

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

+

period-beginninginventories offinished goods

Or calculated by the formula:

Consumption inperiod

=

production inperiod

-

Difference ininventories offinished products

1.3.2.2 Estimation of annual costs of project

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

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

for determining profit-and-loss results in the operation years of the project Directproduction costs include: direct cost of materials, direct costs of labor, and generalproduction costs

- Management costs: Include costs of business management and administration and othergeneral costs associated with all activities of the project, such as salaries and allowancesfor the board of directors and project management personnel, depreciation of project

stationeries, guest reception, and a part of business management costs allocated to theproject at an appropriate rate

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

services of the project including salaries and allowances paid to sales staff and costs ofmarketing, advertising, and packaging, etc These costs are often estimated at anappropriate rate by revenue or costs of the project

1.3.3 Determination of profit, loss, and cash flow of

project

1.3.3.1 Tabulation of project basic parameters

The systematic presentation of the basic financial parameters of the project helps investorsand other stakeholders visualize the context of the project, identify what information isimportant to collect and review during the process of project preparation and evaluation as

a basis for making investment decisions accordingly

The table of parameters is usually classified into five main groups: investment capitalgroup, financing group, revenue group, cost group, and other parameter group for theproject analyzer to easily find information

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

The financial analysis should be carried out using Microsoft Excel software because thissoftware allows us to perform calculations from simple to complex In particular, the toolslike Goalseek, Table, Scenarios, Crystal ball will help us to make a lot of advances inanalysis of sensitivity and simulation In addition, Excel is retrofitted with financialfunctions like IRR(), PV(), NPV(), PMT(), etc allows us to save calculating time with highdegree of accuracy

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

It needs to tabulate costs of production or services, revenues, profit and loss, estimation ofaccounting balance, revenue and expenditure balance The financial statements helpinvestors see the financial situation of the project, and it is the source of data that helpscalculation and analysis of targets reflect the financial side of the project

1.3.3.2.1 Financial instruments used to analyze project cash flow

Study of the basic parameters of the project is used in the stage of project identificationstudy, i.e during the formation or drafting of the project when it is looking forward torepairing the main economic and technical features of the project This is only the generalfinancial analysis The next step is to perform detailed financial analysis This work isusually done at the end of the feasibility study stage or during the study to evaluate theefficiency of the project Thus, in all cases, performance of general financial analysisallows saving considerable time for preparation of detailed financial analysis.

To move from general financial analysis to detailed financial information analysis, the use

of financial instruments is needed They are the tables of financial plan for the project

- Table of investment plan

A table of investment plan shows the total investment and capital structure Totalinvestment capital includes fixed capital, working capital, and interest of loan duringconstruction (if any) Based on this table, it will show how the progress of capitalallocation and portfolio of assets are from which to set the basis for calculating the annualdepreciation for the project To calculate, we can tabulate by the following form:

Table of investment plan

Item

Construction stage Production stage

Totalcapital(Atcurrentprice)Year 1 Year 2 -

Year 1 Year 2

the table of investment plan Fixed asset's useful life is usually determined by the taxconditions For investment projects in Vietnam, determination of useful life fordepreciation of fixed assets is based on the legal time frame of determination in accordancewith current regulations of Ministry of Finance.

There are many methods for determination of depreciation value, but when analyzingannual depreciation for fixed assets invested in the projects, it is common to apply thestraight-line depreciation method The annual residual depreciation value in the table ofinvestment plan will be calculated by taking historical cost minus accumulateddepreciation and plus new investment value (if any)

Table of depreciation plan

Residual value at the end of period

For investment projects having a variety of assets with different useful lives, each type offixed assets should be made a separate table of depreciation plan then aggregated into onegeneral table of depreciation plan for all types of assets Based on this table of depreciationplan, we will know how much the annual depreciation is and how much the remainingundepreciated value of the assets is at the end of the project

- Repayment plan

For an investment project, financial cash flow only refers to loans and debt repaymentwhile ignoring the mobilized stock capital and repayment of dividends to shareholders.Therefore, the project financial cash flow analysis is a reasonable way to help investorsdetermine the date to mobilize loans and calculate financial costs by interest andrepayment of principal debt All these are reflected via the repayment plan of the project.Table repayment plan for principal debt and interest

Period-beginning balance

Interest incurred in period

Period-+

Interestincurred

in period

-Repaymentamount inperiod

+ Debtincreased

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

(4) This period-beginning balance is equal to the previous period-end balance

(5) The amount of repayment in period depends on the expected repayment plan that theinvestor agree with credit institutions

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

from product salability in the future operation of the project

Table of production and revenue estimation

Table of cost expectation reflects all costs incurred during the operation of the project The

costs are determined on the basis of consumption of inputs to produce the output levelcorresponding to an annual mobilization capacity of the project and expected prices ofthese inputs on the market

Table of project cost expectation

- Table project profit and loss plan

Table project profit and loss plan is built to reflect in general the expected performance ineach period (year, quarter, and month) throughout of the project's future life In thesimplest form, table project profit and loss plan is associated with two types of generalterms: revenue and costs Revenue reflects the completion level achieved from the projectactivities (sales and service revenue) Meanwhile, costs show the level of consumed effort(consumption of assets, costs for inputs, and financial costs) to generate correspondingrevenue Finally, the two important results to be determined in table project profit and lossplan are profit (EBIT and net profit) and the obligation to pay the annual corporate incometax In which, expected corporate income tax rate is one of the items needed to determineupon construction of project cash flow plan

Table project profit and loss plan

Net revenue

Cost of goods sold (subtracted)

Gross profit

Operating costs (subtracted)

Earnings before interest tax and loans payable

(EBIT)

Interest payable

Earnings before tax (EBT)

Corporate income tax (subtracted)

Profit after

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

- Depreciation of fixed assets

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

- Salaries, wages, and allowances

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

- Costs of outsourced services

- Payment of interest on loans for production and business

- Extraction of reserves

- Costs of consumption of goods and services

- Costs of advertising, marketing, and promotion

- Taxes, fees, charges, and land rent

Fees deducted when calculating income subject to corporate income tax:

- Export tax

- Input value-added tax on export goods and services

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

- Table of cash flow plan

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

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

* Indirect Method: Net cash flow from business operations to be adjusted from profit to netcash flow, and net cash flow from investment and financing activities is determinedsimilarly to the direct method

Reasons to build table of cash flow plan for the project

- Expecting the future achievements of the project

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

1.3.3.2.2 Calculation of targets reflecting financial side of project

* Target to assess the financial strength of business

- Coefficient of equity against debt: This coefficient must be greater than or equal to 1 Forpromising projects with clear obtained efficiency, and if this coefficient may be smallerthan 1, about 2/3, the project is very favorable

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

- The ratio between current assets against current assets in debt

- The ratio between working capital and short-term debt

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

Among the above targets, the 3rd one is applied only to projects of operating enterprises,while the remaining four targets are applied to all projects The first two targets reflect thefinancial resources to ensure that all projects are implemented smoothly, and the followingthree targets refer to the ability to ensure payment of financial liabilities

1.3.4 Assessment of project efficiency

- Target of net present value (Net Present Value - NPV): The net present value is the totalnet profit of the whole life of the project discounted to current year at a certain discountrate

* Formula:

r P

NPV

)1(

1)1(+

×

−+

×

=Where Pi+1 = Pi + G or P increase steadily with an amount G,

×

)1(

1

n r

r r

−

×

r r

r n

r

G NPV

)1(

1)1(

* Formula in Excel

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

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

In which:

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

value1, value2 : amount of money earned for each period of the project life cycle

* Assessment of NPV target:

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

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

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

is valuable financially

* Advantages and disadvantages of NPV target

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

+ This target does not reflect the using efficiency of capital

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

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

* Formula:

AV = NPV * r(1+r)

n

(1+r) n – 1

* Assessment of Target AV:

- Any project that has larger AV is valuable financially

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

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

* Advantages and disadvantages of Target AV:

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

additional investment times

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

also it does not reflect using efficiency of capital

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

* Formula

( ) ( )

∑ +

∑ +

B

0

01

1

/

* Assessment of Target B/C

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

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

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

* Formula

Or

In which:

Bi - income value (Benefits) in year i

Ci - cost value (Cost) in year i

n- operation time of the project

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

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

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

2 1

1 1

2

NPV NPV

NPV r

r r IRR

+

×

−+

=

In which: r1 - discount rate for value NPV1 > 0

r2 - discount rate for value NPV2 < 0

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

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

r corresponding at NPV = 0

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

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

BI OB OI BI BI CI

BI AB

CD

AB CI

BI CD

+

=+

IRR (values)Values is the range containing values obtained over the period, equivalent to the range ofvalue1, value2 in NPV function

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

- Investment recovery time:

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

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

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

p is the unit price of products and services

Q0 is the breakeven output

p v

F v p

F p p Q D

0 0

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

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

* Assessment

NI + depreciation

Total investmentNet income + depreciation

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

- If the project has more plans, any plan with smaller breakeven point is more highlyappreciated

In fact, projects in different sectors have different capital investment structure, thusbreakeven points are very different Therefore, the breakeven point is only considered foreach specific project

1.4 Sensitivity analysis

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

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

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

* The unsafe input quantities are:

- Interest rate calculated in the project

- Sales of products and services

- Unit price of products and services

- Variable costs

- Period of project operation

* The affected output quantities are:

- Net present value (NPV)

- Internal rate of recovery (IRR)

- Capital recovery time with consideration of time factor of currency

- Breakeven point

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

* Sensitivity analysis steps:

- Determining major unsafe input quantities of the project

- Estimating likely changes in the value of these quantities

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

- Interpreting the results and their meanings

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

2.1 About the Investor

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

Release company name: Công ty cổ phần Vật tư và Thiết bị Toàn bộ

Trading name: MATERIAL AND COMPLETE EQUIPMENT EXPORT

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

Agricultural Machinery Corporation; member of the Vietnam Chamber ofCommerce and Industry; the founder member of Petrolimex corporation (PJICO),the founder member of Vietnam-Japan Engineering limited company ( VJE)

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

2.1.2 Functional Task, activity areas.

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

- Business in industrial induction furnaces and steel production equipments such as:medium frequency furnace, coal gasifying furnace, etc

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

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

- Purchasing all kinds of iron, steel, non- ferrous scraps to recycle, re-product forproduction and business

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

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

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

KV or less

2.1.3 The organizational management structure

ORGANIZATION CHART OF MATEXIM COMPANY

DEPUTY GENERALDIRECTOR

DEPUTY GENERAL

DIRECTOR

DEPUTY GENERALDIRECTOR

ORGANIZ ATION DEPT

FINANCE-ACCOUN TING DEPT.

GENER AL TRADIN

G DEPT.

METAL DEPT.

TECHNI CAL MATER IALS DEPT.

CAR AND SPARE

COMMERCIAL

SERVICE

ENTERPRISE

PRODUCTION AND SERVICE BUSINESS ENTERPRISE

HANOI GENERAL INVENTORY

MATEXIM BẮC KẠN BRANCH

HCM MATERIALS BRANCH

DA NANG MATERIAS BRANCH

BAC KAN SPONGE IRON FACTORY

BAN CUON

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

The table of production and business operation in past three years

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

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

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

- Finance:

+ Healthy finance,no prolonged arrears

+ Steady growth and stability in the business

+ Sufficient capital to correspond to the project

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

Other resources:

+ The company have the strong supports from the Corporation, the Ministry ofIndistry, especially the People’s Committee of Bac Kan

+ Having the stable revenue sources from business for retal offices, workshops andtransportation with annual profits up to tens of billions dongs

2.1.4.2 The labor and wage situation

The total staff of the company count to the beginning of 2012 is 570 people with theaverage income in recent 3 years is 5.700.000 NVD

2.1.4.3 Materials and fixed assets situation

Now, the company is managing to use 397.299m2 of land with 19.017m2 solidwarehouse và 7117 m2 office

* The statistic on land and workshop system (Fixed Assets)

Land Warehouse Office

Total

397.29

9 19.017 7.117

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

2.2.1 The necessity of investment

2.2.1.1 The world steel industry

Pig-iron and steel play a very important role in the development process of thehuman civilization for millennia because they are used very widely in the machinemanufacture, construction, transportation, agriculture, energy, production ofhousehold utensils, health care, national security, etc Along with coal and paper,steel is the basic material of the industrial revolution Nowadays, although manykinds of matierials have been researched, produced and applied such as plastic,glass, ceramic, etc but steel still plays the key role in a long time Therefore, thesteel production in the world has grown rapidly, especially from the second half ofthe 20th century back here The world steel production from 1900 to the presentlisted in the Table 2.1, rate of steel consumption per capita of some countries listed

in the Table2.2

Table 2.1 : The world steel production from 1900-2008

Unit : million tons