Assignment 2

BAFI3184

Student’s name : Ly Anh Tuan

IDs :s3818425
Lecturer : Pham Thi Minh Thuy
Class : Thursday 11.30pm
Words: 1979
Contents
Part 1...........................................................................................................................................................2
Part 2...........................................................................................................................................................2
a).............................................................................................................................................................2
b).............................................................................................................................................................4
References...................................................................................................................................................6
Part 1
The purchase of a block of land in District 7 for building a warehouse is $1,440,000 which is
fixed cost since its value remain the same and can be resold for a same or higher price. Initial
investment is the amount of money required to start a project. The company bought the land for
building a warehouse but now they decide to build their HO so land price in three years ago is
not included. The current market value of this land ($2,580,000) is an opportunity cost because
the company can sell the land for other uses, so the land's value is considered cash outflow. The
grading cost ($138,600) and construction cost ($3,780,000) are investment costs as they are
required in project. In this scenario, the consulting cost ($13,800) is sunk cost because it is a cash
outflow that had been spent in the past and it does not affect the project anymore.
The formula for calculating the initial investment of company's project:
Initial Investment = Opportunity Cost + Grading Cost +Construction Cost
In conclusion, the initial investment is $6,498,600.

Figure 1: Result of initial investment

Part 2
Considered: + building factory in southwestern region is project A

+ building factory in northeast region is project B

a)
Appropriate methods play an essential role in evaluating which project is more effective for
Vinatex. In this case, the Payback Period, Net Present Value (NPV), and Internal rate of return
(IRR) are applied. The payback period method is used to evaluate how long it takes to receive
the initial investment in a project from operations (Kagan, 2021). Net present value approach can
measure the value of cash flows obtained in the future from an initial investment (Mendell,
2020). The IRR approach can calculate an expected annual growth rate of an investment
(Fernando, 2021).

Table 1: Payback period of project A and B

The shorter the payback period is, the better the project is. The fewer the years need to recoup
initial investment, the higher chances project can reduce the potential risk in the future
( Alhabeeb, 2016). From table 1, project A provides a better payback period of 1.9 years than
project B, which is 2.48 years. Thus, meaning project A is capable of recovering the amount
invested faster than project B, about seven months.

Table 2: Result of NPV from project A and B

If the cash inflow is higher than the cash outflows, the NPV would be positive, and the project
would be suitable in the future (Alhabeeb, 2016). On the other hand, the net present value would
be negative, and the project would be rejected when the cash inflows are lower than the cash
outflows. In table 2, both project A and B has a positive NPV which implies that the profit
earned is around 3 and 4 times higher than the initial investment. Nevertheless, the NPV of A is
$110,195,94 higher than B. Hence building a factory in the southwest would create more profit
than in the northeast over ten years.

Table 3: Result of IRR from project A and B

For a project's appraisal, its internal rate of return needs to be the same or higher than the firm's
cost of capital or discount rate (Alhabeeb, 2016). As shown in Table 3, regarding IRR, project A
has a higher rate (53%) than project B (48%), meaning initiative A is better.
Analysis
Vinatex can only choose one of the projects to invest in, so these initiatives are mutually
exclusive. Additionally, the time value of money is usually regarded when choosing between
mutually exclusive investments (Young, 2021). Consequently, NPV and IRR are more
appropriate because they include the time value of money, whereas the payback period ignores
(Bierman & Smidt, 2006). The payback period is for determining the liquidity of an investment
and the lost opportunity risk to the business (Hajdasiński 1993).
The IRR’s assumption is that all cash flows can be reinvested at the internal rate of return, which
is an issue because it is uncertain that equally profitable opportunities will be available as soon as
cash flows incur (Jan 2020). By contrast, NPV presumes that reinvestment occurs at the cost of
capital which is reasonable. IRR might provide contradictory results, so the NPV approach is
more suitable because its goal is to optimize its shareholders' wealth (Vadapalli, 2020). IRR
method prefers the rate of return on investment over the total yield on investment, while the NPV
takes the total yield on investment into account. As a result, when both projects have a positive
NPV value, the one with highest NPV would significantly impact shareholders' capital.
In conclusion, I will use NPV to compare which project has higher profitability and the payback
period method as it will help the company measure the amount of time needed to recover its
investment. Project A is a more feasible investment than project B because of the NPV and
payback period results. Specifically, A has a higher value in NPV and a shorter payback period.
Vinatex's Board of Directors should consider building a new yarn factory in the southwestern
region.

b)
Sustainable development is defined as one of the most disputed conceptions and vital of our
time, consisting of three key elements: economic, environmental, and social (Abazi et al., 2017).
Sustainable development plays an indispensable role in the growth of a company because there is
a positive connection between economic, social, and environmental practices and a company's
financial performance (Martínez-Ferrero & Frías-Aceituno 2015). Firms practicing CSR at a low
level have increased performance maintained in the short term, whereas when a company is
significantly engaged in sustainable practices, the rises in financial performance stays in the long
run. The reinvestment into CSR practices guarantees firms' success and survival in the long run
(Collier, 2008).
In this scenario, I will discuss the relationship of those qualitative factors with project A and how
they can help the company grow sustainably.
 Economic factors
If the Board of Directors opts for project A, a new yarn factory will be installed in the southwest,
empowering the company to the leader in production. They would then control the largest share
of the yarn industry, creating a market leader effect. Market leadership is regarded as a positive
trait for a company because rising market share has a significant impact on overall brand
perception (Kamins & Alpert 2004). Customers are not ideal information processors because
they based on basic characteristic like consumption intensity to determine a commodity, so best-
selling title will certainly be regarded as a remarkable accomplishment for a company, helping
firm gain a degree of positive affect. As a result, more customers would be attracted to the
company's goods, increasing sales. The company's promotional strategies also would be more
successful if it has a good brand image and position, since customers would be more interested in
its goods and more likely to buy (Penpoin, 2020). Project A has a higher net present value than
project B, so investing in A has a higher return relying on the current factory and increasing
production capacity.

Furthermore, a positive reputation among financial stakeholders will aid a company's ability to
raise capital and do so at a lower cost than competitors. As a result, increases in a company's
credibility appear to lower the overall cost of capital (Srivastava et al. 1997). Furthermore, since
Vinatex is a top firm, it will attract a huge interest from lenders and investors (Root, 2017).
Popular names have tendency to be credited with sponsorship than lesser-known brands, the risk
of default and failure is minimized in the long run (Pham & Johar 1997). Because of their high
demand, retailers and distributors tend to work with market leaders (Root, 2017). Vinatex will be
able to build partnerships with distribution outlets more easily. As a result, growing the
company's revenue would make firm easier to negotiate better distribution conditions with
distributors, like better shelf position in retail stores and favored position in catalogs and sales
circulars. Market leaders tend to sell their products in large quantities so suppliers will choose to
partner with them, and they can provide discounts or more lenient credit terms to preserve
cooperation. Those deals are advantageous to market leaders because they reduce costs (Penpoin,
2020). Consequently, project A is superior to Project B in terms of economics.

 Environmental factor

To be an industry leader in yarn production. Vinatex will have to face significant environmental
effects from its manufacturing process. The acrylic yarn contains a high proportion of today's
commercial yarn. Acrylic yarn production consumes a large number of fossil fuels and emits
poisonous fumes into the atmosphere. Nearly 730,000 microplastics are emitted into the water
each time acrylic yarn is washed in a regular in-home washing machine. When acrylic yarns are
discarded, it can take up to 200 years for them to biodegrade fully. Hence. Synthetic yarns cause
a global plastic pollution crisis (darn good yarn 2019). Cotton yarn production is harmful to the
environment. Cotton plants require a huge amount of pesticide use, which takes up 16% of all
insecticide and nearly 7% of all herbicides use globally (Capestrain 2017). Furthermore,
producing fertilizers to grow cotton leads to a significant proportion of carbon dioxide,
contributing to climate change and also contaminating local water sources. Cotton yarn
production needs an enormous amount of water, and it depletes soil fertility. Maintaining soil
fertility needs massive amounts of nitrates, releasing nitrous oxide that contributes to global
warming 300 times higher than CO2. The production phase of cotton yarn emits 2.81 CO2 kg.
Moreover, the most vital stages of the production, including dyeing (1.24 CO2 kg.) and spinning
(0.64 CO2 kg.), are related to reactive reagents and pigments, as well as electrical and thermal
energy (Bevilacqua et al. 2014). The textile industry's critical environmental effect is the
emission of large volumes of chemical loads into the environment (Kumar, 2020). Knowing the
negative impact of yarn production, in order to expand sustainably, Vinatex could develop
wastewater treatment plants and upgrade dyeing plants. For instance, recovering cooling water
and reusing different process waters can decrease electrical energy consumption in CO2 by 32.2
percent and thermal consumption in CO2 by 41.7 percent. (Bevilacqua et al., 2014). Being green
would help Vinatex gain more consumer loyalty because consumers nowadays have a high
awareness of products’ environmental effects and they are more likely to believe in a business
that tackles environmental or social problems (Butler, 2018).
  Social factors

The textile industry of different units includes dyeing, weaving, printing, spinning, finishing
(Fibre2fashion,2007). The main hazards are physical, chemical, ergonomically, and
physiologically hazards, long duration of working hours, and improper ventilation, which can
cause health hazards. Textile industries use a vast amount of chemicals, reactive dyes, hazardous
solvents, and other toxic substances, so long-term contact and exposure can impact workers'
health (Jabeen & Jabeen 2017). For instance, a yarn manufacturing unit requires high-speed
machinery that could lead to noise pollution and result in headaches and dizziness. Moreover,
when employees usually work in processing and spinning cotton with these machines may have
lung diseases due to inhalation of cotton dust (Ask-ehs, 2019). For workers' health and safety,
the company's practices need to be implemented, such as well-maintained machinery to decrease
noise pollution, adding training programs about awareness of health hazards, or keeping facilities
for employees sanitary. If the cooperation chooses project A, it should guarantee the most
healthy and safest working condition for laborers, hence helping Vinatex become sustainable.
The benefit of this improvement is that they can attract more employees and investors because
they have a tendency to like to work with companies being progressive with corporate
environmental and social programs (Rogers,2016). In the case of ignoring employees' rights,
Vinatex may not achieve their goal as their workers would not willingly work for the firm but
instead for competitors who focus on improving the working environment.
Conclusion
Project A is a better investment for Vintax's growth due to the advantages in the economic
factors. However, because of the characteristics of the textile industry, the firm should pay more
attention and apply practical action to improve the environmental and social aspects in order to
be sustainable.

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