Chapter 5:

FINANCIAL ANALYSIS OF
INVESTMENT PROJECTS

Instructors: ThS Huỳnh Thủy Tiên

CHAPTER 5 OBJECTIVES

1 Understand the role of financial analysis of investment projects;

2 Understand the method of profit and loss forecasting and cash flow
balance for the project;

3 Calculating the basic criteria in project financial analysis

4 Apply practical knowledge to financial analysis for specific projects.

1. THE ROLE OF PROJECT FINANCIAL ANALYSIS
Financial analysis to assess the feasibility of the project

- Consider needs and

Review the operational
ensure financial resources
and financial performance
to effectively implement
of the project:
investment projects
- Implementation costs
- Determining investment
- Benefits and financial
scale, capital structure,
performance.
funding sources for the
project.
2. PROJECT FINANCIAL STATEMENT OF THE PROJECT
2.1. Identify funding sources for the project

2.2. Estimated revenue from project activities

2.3. Estimated production cost of the project

2.4. Estimated business results of the project

2.5. Determine Accounts Receivable

2.6. Determine Accounts Payable

2.7. Cash fund budget

2.8. Handling some other expenses

2.9. Estimate the cash flow balance of the project

2.1. DETERMINATION OF SOURCE OF SPONSOR FOR THE PROJECT

❖ Funding sources for the project include: allocated budget, lending banks, share
capital, joint venture capital, own capital or capital from other sources.

❖ It is necessary to consider the amount and time of receiving funding to ensure the
progress of investment implementation, avoiding capital stagnation.

❖ Need to compare capital needs with the ability to secure capital according to
quantity and schedule.

❖ It is necessary to establish an annual capital mobilization schedule for each

specific source.
2.2 ESTIMATE REVENUE FROM PROJECT OPERATIONS

❖ Help investors estimate project performance, analyze financial indicators

and determine cash flow scale.

❖The project's operating revenue includes: revenue from selling main

products, by-products, scraps and scraps and from services provided to
outsiders.

❖Project revenue is calculated for each year or based on the project's

annual production and consumption plan to determine.
2.2 ESTIMATE REVENUE FROM PROJECT OPERATIONS

Selling Selling
REVENUE output price/SP

Production Finished goods Finished goods

volume inventory at inventory at
Consumpt during the the end of the the beginning
ion period period of the period

Finished goods
inventory
difference
 2.3 PRODUCTION COST ESTIMATE OF THE PROJECT

- Calculated for each year throughout the life of the project.

- Based on the annual production plan, depreciation plan, debt repayment plan of the project

❖ Depreciation: is an accounting tool for allocating fixed

investment costs to product costs on an annual basis.
Depreciation is part of the cost of production.
❖ Depreciation increases: profits, corporate income tax
decrease and vice versa.
❖ Depreciation is a form of journal entry of accounting . So
not the cash flow category.
❖Depreciation is a factor of cost affect pre-tax profit.
❖ The indirect effect of depreciation on cash flow is also
known as Tax Shield of Depreciation.
 Depreciation methods

Depreciation rate is deducted List the years of equipment

annually, equal during the life and add them together to
depreciation period get a total (Sum). Depreciation The asset's value chain is
for each year is calculated: reduced every year by a
GT Residual + Year 1, factor n/ Sum x Total certain percentage.
initial TS value TS depreciation.
SLD + In year 2, take (n - 1)/Sum x
Total depreciation.
Longevity TS
Also known as accelerated
depreciation
2.4. ESTIMATE BUSINESS RESULTS OF THE PROJECT

❖ Based on the estimate of total revenue and operating expenses each year, the investor
estimates the project's annual business results.
❖ This is the criterion that reflects the business results of each year and the project life cycle.

Approach from a project perspective Approach from an accounting perspective

2.5 DETERMINATION OF RATES

❖ Sales revenue in the period of the project includes revenue paid và unpaid
revenue.

❖ Unpaid revenue is represented by accounts receivable (AR - Accounts

Receivable)

Actual revenue Revenue in the Difference between accounts

in the period period receivable (DAR)

DAR = Accounts receivable at the end of the period -

Accounts receivable at the beginning of the period
2.6. DETERMINATION OF PAYABLES

❖ When buying goods, by agreement between the buyer and the seller, the
purchase cost includes: the immediate payment and the payment after a certain
period.

❖The postpaid part is the Accounts Payable (AP).

Total amount Payable difference

Purchase costs Purchase (DAP)

Inside:
Difference between accounts payable (DAP) = Ending payable - Beginning payable
Value (-) in cash flow DA
2.7 CASH FUND

❖ The cash retained for the transaction is called the project's cash balance.
The project should have an inventory of cash as current assets. – PA at
cash outflow of DA

❖ When the demand for cash funds increases, increase cash out of the
project, a decrease in the demand for cash funds will increase cash
inflow (decrease cash out)

❖ When the project ends, the cash fund demand is zero, then the project will
have a revenue from the remaining cash balance in the last year. (value -
in cash outflow)
 5.2.8. HANDLE SOME OTHER COSTS

Liquidation value of fixed assets Project sunk costs Cost of land use

✓ Liquidation of fixed ✓ Sunk costs are costs ✓ If the land is rented: land rent
assets represents the cash is normally accounted into
that are spent before operating expenses;
inflow of the project. a decision is made to ✓ If the land is allocated and used
✓ The liquidation value of implement the only for the project, do not record
an increase in opportunity cost;
fixed assets is usually project. For example, ✓ If the land is allocated to be used
determined based on the expenses incurred for any purpose, the opportunity
actual value (market cost must be increased
when going to actual
✓ Land is a fixed asset that is not
value) of the asset at the exploration, looking depreciated (value does not
time of liquidation. for investment wear out/lose over time) but the
cost of land improvement must
✓ For simplicity, people often opportunities, ... be depreciated.
take book value of the ✓ This cost is not ✓ Land deposit or rent deposit
fixed asset as the will be included in the initial
included in the investment but not amortized
liquidation value of the project's cash flow and will be received at the end
fixed asset. of the project.
5.2.9. PROJECT'S CASH LINES BALANCE ESTIMATE

➢ Ensuring the balance of cash inflows and outflows is one of the important goals in
project financial analysis.
➢ Income is the difference between revenue and expenses at the time of review.
Cash flow is the difference between receipts and payments at the time of review.
So the cash flow at some point in time may be different from the project's income at that
time.
➢ Currently, there are many viewpoints on the project's cash flow statement such as
financial point of view, economic point of view, government budget point of view.
➢ The most common in project cash flow assessment are the preparation of the project
cash flow statement from the total investment point of view - the point of view of
the lender, the bank (TIP) and the total equity point of view - the point of view of
the shareholders' equity ( All Equity Point of view - AEPV)
2.9 PROJECT CASH LINES BALANCE PROJECT (cont'd)
Projecting cash flows from
a total investment point of
view - TIP
Investment capital includes
both equity and borrowed
capital.
The TIP perspective is also
known as the bank's point of view,
it helps the bank to evaluate the
project's efficiency and ability to
repay the loan to make a loan
decision for the project.
Projecting cash flows from an all-
equity point of view - AEPV
Apply for projects with equity
only, no loan (no interest payments on
bank loans). Profit before tax and
interest is also profit before tax. The
project's annual corporate income tax
has no interest tax shield.
Constructing cash flows from this
point of view is called the tax-free
project's cash flow.
Giúp đánh giá hiệu quả của dự án
trong trường hợp không có tài trợ để từ
đó đưa ra quyết định đầu tư phù hợp.
3. FINANCIAL EFFICIENCY OF THE PROJECT
3.1. Some basic financial analysis indicators
3.1.1 Simple interest rate, compound interest rate, real interest rate and
nominal interest rate
- Borrow at simple interest is the interest calculated only on the principal amount
without calculating interest in the cumulative way or the interest of the previous
period does not enter the principal to calculate interest for the following period.

Formula :
I = P. r. n
Inside:
- I : is simple interest
- P: Loan amount
- r : simple interest
- n: number of periods before payment
EXAMPLE

Company A borrows 500 million dong

at an interest rate of 2%/month based on
simple interest. The loan term is 6 months.
How much money does the company
have to pay for debt every month and at
the end of the 6th month?
3. FINANCIAL EFFICIENCY OF THE PROJECT

3.1. Some basic financial analysis indicators

3.1.1 Simple interest rate, compound interest rate, real interest rate and
nominal interest rate
- Borrowing at compound interest is the interest of the previous period
entered into the principal to calculate for the next period

Formula : FV = PV x (1 + i) n

Inside:
- FV: future value of money
- PV: the value of the present amount
- i : interest rate in the period
- n: number of loan periods
EXAMPLE

Company A borrows 500 million dong

at 2%/month with compound interest. The
loan term is 6 months.
Calculate the total amount the
company has to pay to creditors at the end
of the loan term?
3. FINANCIAL EFFICIENCY OF THE PROJECT

3.1. Some basic financial analysis indicators

3.1.1 Simple interest rate, compound interest rate, real interest rate and
nominal interest rate (cont'd)
- Borrow at real interest rate
The real interest rate is the interest rate for which the period of the statement
of interest is equal to the compound period

Formula: i
2 = (1 + i 1) n-1

Inside:
- i1 : short-term real interest rate
- I2 : short-term real interest rate
- n : number of short periods in long periods
FOR EXAMPLE

A credit book has an interest rate of

1.2%/month, compounded monthly.
Calculate the real interest rate/year?
3. FINANCIAL EFFICIENCY OF THE PROJECT
3.1. Some basic financial analysis indicators
3.1.1 Simple interest rate, compound interest rate, real interest rate and
nominal interest rate (cont'd)
- Borrow at nominal interest rate
Nominal interest rate is the interest rate for which the period for which the rate
is stated is different from the period for which the interest is compounded.
Usually the compounding period is shorter than the speech period.

Formula:
i = (1 + r/n1) n2 - 1
Inside:
- i : real interest rate in the calculation period (years)
- n 1 : Number of compounding periods in the speech period
- n2 : Number of compounding periods in the calculation period
FOR EXAMPLE

A credit book with an interest rate of

20%/year, compounded monthly. Calculate
the real interest rate/year?
3. FINANCIAL EFFICIENCY OF THE PROJECT
3.1. Some basic financial analysis indicators
3.1.2 Present value
To be accurate in calculating the financial performance of a project, it is necessary to
bring future values to the present by discounting.

FV
PV =
( l + i )n

Inside:
- PV: is present value
- FV: is the future value
- i: is the discount rate
- n : number of calculation periods
EXAMPLE

A project after 5 years is expected to bring

in an amount of 7,000,000 USD, LS is
7%/year. What is the present value of that
money?
 3. FINANCIAL EFFICIENCY OF THE PROJECT
3.1 Basic indicators reflecting project financial performance (cont'd)
3.1.3 Payback Period - TPp (Payback Period)

The payback period TPp is the time required to fully repay the invested capital, that is, the
time required for the total present value of the recovery to equal the total present value of the
invested capital.
σ𝑻𝒕=𝟎 𝑷𝑽 𝑹𝒕 = σ𝑻𝒕=𝟎 𝑷𝑽 𝑪𝒕 (1)

Inside:
Rt: Net (net) income at year t.
Net income = net profit + depreciation.
Note: In the last year of the project life, net income = net interest + depreciation + liquidation
value.
Ct: Investment capital realized at year t.
(Including both fixed capital and working capital)
5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
3.1 Các chỉ tiêu cơ bản phản ánh hiệu quả tài chính dự án
3.1.2 Payback Period - Tpp (Payback Period) (cont.)
✓ From formula (1) we have
5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
3.1 Basic indicators reflecting project financial performance
3.1.2 Payback Period - Tpp (Payback Period) (cont.)
Exercise:
Một dự án có thông tin như sau:
Year Investment cost Net profit Depreciation Note
0 2.0 The discount
1 3.0 0.45 1.3 rate is
10 years
2 1.5 0.50 1.3
3 0.55 1.3
4 0.70 1.3
5 0.75 1.3

Calculate the payback period of the project?

 5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
3.2. The basic indicators reflect the financial efficiency of the project
Payback Period - Tpp (Payback Period)
If T is greater than the investment period (n) => the project is not likely to pay
back directly.
When T>n, there is no need to calculate other financial performance indicators.
History
using
only If the project is not for financial profit but for public purpose and
objectiv brings social welfare => investment should be made but need to
e T: mobilize capital from the State budget or call for charity.

If T < n, the project is likely to have a direct payback and needs a plan to
recover the capital.

When comparing investment solutions, the solution that

makes T smaller than n is the better solution.
 3. FINANCIAL EFFICIENCY OF THE PROJECT
3.1. The basic indicators reflect the financial efficiency of the project
3.1.2. Net Present Value - NPV (Net Present Value)
The present value of net income is the difference between the total present value of the salvage
value calculated for the entire investment period, minus the total present value of the investment,
that is, the total present value of profit after fully paying back the investment.

Inside:
Rt: Net (net) income at year t
Net income = net profit + depreciation
Ct: Realized investment capital at year t
Includes both fixed capital and working capital.
i: project discount rate
m is the investment period (years)
5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
3.1. The basic indicators reflect the financial efficiency of the project
3.1.2. Net Present Value - NPV (Net Present Value)
Comment on NPV . indicator

Advantage Limit

➢ NPV shows the total present value of ➢ NPV has not yet revealed the
the interest after the payback. NPV profitability of the project. Therefore,
overcomes the disadvantage of TPp
sometimes the project is profitable
indicator.
but should not be rushed to invest
✓ If NPV > 0, the project is
because the profit may be low.
profitable.
✓ If NPV < 0, the project is at a loss. ➢ The new NPV tells us the result but

✓ If NPV = 0, the project breaks even. not the effect yet

5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
5.3.2. The basic indicators reflect the financial efficiency of the project
b. Net Present Value - NPV (Net Present Value)

When comparing multiple projects, NPV is an important indicator (although a larger

NPV is not enough to draw conclusions))

Using Within a project, when it is necessary to compare investment solutions,

the solution that makes the NPV larger is the better solution.
the
NPV .
indic
The relationship between T and NPV:
ator + T > n will lead to NPV < 0
+ T < n will lead to NPV > 0
+ T = n will lead to NP V = 0

When NPV > 0 we expand that project. The project should not be said to be
feasible. Feasibility depends on many factors.
5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
3.1. The basic indicators reflect the financial efficiency of the project
3.1. The basic indicators reflect the financial efficiency of the project
➢ Internal rate of return, also known as internal rate of return, is denoted by IRR.
➢ NPV is a function of the discount rate i%, i.e. NPV = f(i).
➢ If we now choose an interest rate r% and use it to discount the project that results in NPV = f(r) = 0,
then this rate r is called the internal rate of return - IRR.

Thus, IRR is the discount rate at which if we use to determine the NPV of the project, the NPV
of the project is 0.

❖ If IRR < u, the project has a loss, that is, NPV < 0
❖ If IRR = u the project breaks even, then NPV = 0
❖ If IRR > u the project will be profitable, ie NPV > 0
 5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
3.1. The basic indicators reflect the financial efficiency of the project
3.1.2 Internal Rate of Return — IRR (Intemai Rate of Return)

To determine the IRR, let NPV = 0 and solve this equation to find the IRR solution.
However, solving this equation is very complicated, sometimes impossible to solve. So interpolation or
extrapolation method is often used

Select i1 so that NPV > 0

Interpolation
method Select i2 so that NPV < 0.
 5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
3.1. The basic indicators reflect the financial efficiency of the project
3.1.2 Internal Rate of Return — IRR (Intemai Rate of Return)
➢ Indicators T, NPV, IRR reflect the investment efficiency of the project over the whole investment term. To
evaluate the financial performance of an investment project in a year, we rely on the break-even point.
➢ When calculating T, NPV, IRR, we must consider discounting because it involves many periods. But
when calculating BEP, because it is only related to the 1-year period, the discount rate is not used.
➢ The break-even point is the point at which revenue equals costs, i.e. the intersection of the revenue and
cost functions.
There are three types of breakeven points:

Theoretical break - even Cash breakeven point

1 point. 2 (money breakeven point).
3 Debt break-even point.
 5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
5.3.2. The basic indicators reflect the financial efficiency of the project
d. Break Even Point - BEP (Break Even Point).
(1) Method to determine theoretical break-even point

Calling the output in the year of calculation is X, we see:

✓ If X < x : loss
✓ If X > x : profitable
✓ If X = x : break even
 5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
5.3.2. The basic indicators reflect the financial efficiency of the project
d. Break Even Point - BEP (Break Even Point).
(2) Method of determining the current breakeven point (cash breakeven point)
Profit and loss score does not take into
account debt repayment. But in investment,
there is often borrowed capital, so it is
impossible not to consider debt repayment.
The cash breakeven point determines
the level from which the project has cash
to repay the loan. At this time, in fixed
costs, it is necessary to subtract basic Inside:
depreciation and establishment costs c1 : theoretical fixed cost, calculated above.
Customer: basic depreciation and business establishment costs.
Let c2 is the current fixed cost, we have: Now the revenue function y1 remains unchanged.
And the production cost function: y2 = bx + c2 = bx + (c1 - KH)
C2 = C1 - KH
 5.3. FINANCIAL EFFICIENT PERFORMANCE OF THE
PROJECT
5.3.2. The basic indicators reflect the financial efficiency of the project
d. Break Even Point - BEP (Break Even Point).
(3) Method of determining the break-even point for debt
repayment

From the cash break-even point, the project

begins to have money to pay off debt. Debts here
include the amount owed for the year and the
corresponding corporate income tax
Liabilities and corporate income tax payable in
the year are treated as fixed expenses for that year.
Thus, the fixed cost in the formula to find the
break-even point of debt repayment will be Fixed
cost of cash break-even point + debt payable + Let c3 be the fixed cost of debt repayment. We have:
CIT payable in the year: c3 = c2 + Debt + Tax TNDN
Right now: y1 is still the same
And y2 = bx + c3 = bx + [(c - KH) + + Debt + Tax TNDN