DEVELOPMENT BANKING

SPRING SEMESTER 2024

LECTURER: PHUNG THANH QUANG
Phone: 0904657189

A. FORMULAR:
1. Cash flow of a project (net cash flow): NCF = inflow – outflow
2. cash flow in some points of view:
a. TIP (total investment point of view):
Discount rate = WACC = Kdx(1-T)xWd + Ks xWs
Kd: interest rate of borrowing. Ws: rate of equity against total investment
Wd: rate of borrowing against total investment. T: corporate income tax
Ks: cost of equity capital
b. EPV: discount rate = cost of equity.
3. Granted elements.
1 1
------------ - -------------
Rf/a (1 + r)aG (1 + r)aM L A-L
GE = [1 - ------ ] x [1 - ------------------------------] X ------- x100% + ------- x 100%
r r (aM - aG) A A

Rf: Preferential interest rate.

a: number of payback per year.
r: discount rate each term: r = (1 + r 1) 1/ a - 1
r1: discount rate each year ( market interest)
G: grace period.
M: lending period
A: total amount of investment
L: lending amount.
 B. exercises
Ex 1
A transportation project of Vietnam need to call in $ 250 million ODA in 30 years. ADB makes a
commitment to finance the project with the following conditions:
- Preferential interest rate is 2% per year, the grace period is 3 years, the nonrefundable aid is $ 15
million
- Interest and principal are paid at 6-month term
- The principal are paid regularly for the remaining term after the grace period
- Market interest is estimated 8% per year during the project
Requirement: Determine the granted elements of the project.

Ex 2
If the Interest and principal are paid anually. Calculate GE in this case.
Ex 3.
The Sunshine company is considering two projects, project A and project B. Project A requires the
purchase of an equipment but no working capital investment whereas project B requires a working
capital investment but no equipment. The relevant information for net present value analysis is given
below:
Project A Project B
Cost of equipment $600,000 -
Working capital needed - $600,000
Annual cash inflows $160,000 $120,000
Salvage value (scrap value) of equipment $40,000 -
Project life 8 years 8 Years
The working capital required for project B will be released at the end of project life. Sunshine company
uses an 18% discount rate.

Ex 4
The Sunshine company is considering two machines, machine A and machine B. With the
related information:
machine A machine B
Cost of equipment 40000 48000
Working capital annually 12000 11000
Salvage value of equipment 4000 8000
Life circle 4 years 5 years
Which machine should be used if the discount rate is 10% per year.
Ex 5
The Hanoi wine company plans to establish a factory, which is estimated to produce 650.000
bottles per year. Investment is needed 500 millions to buy equipment using in 20 years. Annual
operational cost is 7.5 millions, other costs including tax and insurance are 2.5 millions. By
using NPV approach, should this wine company buy this equipment or continue buy bottle in
the market with price of 250dong/bottle? The cost of capital is 15% per annum. Tax is excluded.
EX 6
Company A is considering between 2 projects of buying trucks
a, borrows from bank 6 billions, interest rate is 12% per annum. Borrower makes equal annual
payments for 6 years.
B, hires these trucks from leasing company with fee of 1.4 billions per year. Company A is not
allowed to buy these trucks when finishing this contract.
This truck system could help company increase the total sale revenue by 2.6 billions per year.
The operational cost rises by 0.3 billions per annum. Depreciation method applies here is
average depreciation. Cooperate income tax is 20%. Company spend 1.5 billions investing in
this project. Discounted rate 15% per annum.
Question: should A buy or hire this trucks system.
EX 7
The rubber factory has plan to set up a new manufacturing system which can substitute for 3
workers. Salary cost for each worker is 1.25 million per month. New system just needs only one
worker (with the similar salary above) to control this machine. However, the operational cost for
new system is 5 millions per annum. In order to set up this new system, company has to pay 60
millions for installment cost and depreciate annually in 5 years. Cooperate income tax is 28%,
discounted rate: 10% per annum. This machine will be invaluable after 5 years. Calculate NPV
Ex 8
Lang Son Agribank receives the borrowing application of A with information below:
The investment project is to buy a new system with 15 billion fee of installment fees. The
expected useful life of this system is 5 years. The estimated revenue is 12 billion in the first year
of project, and increases at 10% in the following years. The variable cost is accounted at 30%
revenue, fixed cost excludes annual depreciation is 2 billions. Company uses the adjustable
depreciation method. After 5 years, this non-current asset might sell for 1.2 billions after
spending 0.5 billion for repairing. At the first year of project, company has to invest in inventory
with amount of 2.5 billion and collect that entire inventory by the end of the first year.
Cooperate income tax is 20%.
This company propose to the bank to borrow 15 billions for first investment with 12% per
annum interest rate. The interest payment and principal portion are made equal annual payment
at the end of each year. Calculate NPV and IRR of project. Discount rate at 9% per annum is
given.

Ex 9
Minh Hai Bank of Ca Mau is considering the project to innovative line of Electro-optic lamp
company with 5 years life cycle below:
The total initial investment at the beginning of the first year is 200 million, including 180
million to purchase fixed assets and the remaining to buy material reserves. Revenue is
estimated to be 95 million per year from the end of the first year. Raw material costs, wages and
other costs each year (excluding depreciation) was 35 million. Depreciation of fixed assets are
calculated with average method. Material reserves will be revoked in the final year.
After evaluation of the project, the bank said it would provide a loan with 2/3 the asked money
to purchase fixed assets with 12% annual interest rate .Principal will be paid yearly in 4 years
and interest will be paid at the end year. Corporate income tax rate is 25%, discount rate is 10%
per year. Should the bank provide the loan?
If the fixed assets can be leased from a finance company with cost of rent is 50 million per year
and there is no provision to rebuy at the end of the lease term. Should it lease the fixed assets
with unchanged rate?
How much does the rent cost if 2 options are equal?
Ex 10
X Bank is considering a proposal of a enterprise: The enterprise will borrow 100 million from
the bank with 10% rate per year, pay in fixed annuity at the end of each year for 4 years. The
money will be combined with 200 million of the own capital to buy a processing sewing
production line to meet a 4 year long-term contract. Using straight line method for the line,
expected annual turnover is160 million. Other expenses (excluding depreciation and interest) is
30 million per year. Corporate income tax rate is 20%. After 4 years of operating, the line can be
sold of 85 million if the enterprise repair with 35 million cost before selling. The enterprise
owner requests the annual growth of their capital at a minimum of 15% per year. In addition,
increased with expanding production of 45 million financed by capital of the company, the
amount of current assets will be revoked in the final year. Using NPV and IRR to help the bank
evaluate the project, discount rate is weighted average cost of capital (WACC)
Ex 11

Pacific development bank is considering a project with the following information:

-The total investment is 3100 monetary unit, including the full cost to form fixed assets 3000
monetary unit, the remaining for networking assets.
- The entire capital will be invested in the project in year 0.
- Depreciation of fixed assets use the straight line method during 5 years of the project. When
finished project, the liquidation value is not significant.
- When the project goes into operation phase, revenue increase gradually at 10% per year.
Revenue in the first year is 3000 monetary unit.
- Fixed costs excluding depreciation each year is 500 monetary unit, variable costs (excluding
interest) equal to 20% of revenue.
- Net working capital will be increased corresponding to the increase of annual revenue
- Corporate income tax rate is 25%.
- The company is considering take a loan from the commercial bank to finance the project.
- The discount rate is 26% per year.
Request: Suggest a plan to take a loan and determine the project's cash flow. Using NPV to help
the company make decision to invest in the project.
Ex 12
The Vietnam Development bank is considering a project with the following information:
The total fixed assets investment is 6500 million. Net working capital is 300 million. The
investor has a land on which has a factory and intends to use in the project. The market value of
the land using right of 1500 million and the value does not change during the project. Using the
straight line method during the project. When the project is finished, the market value of the
equipment is estimated 150 million.
The life cycle of the project is 5 years. The total investment will be invested in the project in
year 0.
During operation, the annual revenue is 6220 million. Variable costs equal to 25% of revenue,
fixed costs excluding depreciation and interest is 450 million.
The investor asked the bank to provide a loan equal to 65% of the equipment, the interest rate is
14% per year, The principal will be evenly paid yearly. Corporate income tax rate is 25%. The
cost of equity is 15% per year.
Requirements: Using NPV to help the development bank evaluate the effectiveness of project in
view of the total investment.
Assess the capacity payment debt of the projects that investors can use 30% earnings after tax
and all depreciation each year to pay the debt.
b. If the land using right value at the end project is 1800 million. Calculate the NPV of this case
and assess the results.
Ex 13
A 6-year project with the following information:
Costs of buying fixed assets is 66 billion. Net working capital is 6 billion invested in year 0.
Annual revenue is 28 billion from the end of the first year. Annual costs excluding depreciation
and interest is 9 billion. Using the straight line method.
The investor plans to borrow 70% of fixed assets capital investment, including 24 billion from
commercial bank at an interest rate of 18% per year. The remaining will be borrowed from VDB
with interest rate of 10% per year. Priority for paying commercial bank.
Requirements: Define the project's net cash flows that investors can use 100% of annual
depreciation for paying principal.
Ex 14
The company is considering to invest in a project with following information:
- The total investment of the project 2500 monetary unit. Cost of purchasing fixed assets is
2,350monetary unit, the rest of the capital to buy the net assets at the beginning of the second
year. The funding for fixed assets in the early first year and the early second year, respectively is
1350 and 1000 monetary unit.
- Straight line depreciation within 6 years of the project. When the project is finished, the
liquidation assets is 50 monetary unit.
- Net working assets are revoked when finished project.
- When the project goes into operation period (from the second year),generating a revenue of
3,500 monetary unit yearly, the variable costs are 500 per year, annual fixed costs excluding
depreciation and interest 200 monetary unit- The corporate income tax rate is 25%. The
discount rate of the project is 16% per year.
- The owners are considering to borrow money from banks to finance the project, namely to
borrow 60% of the total capital to invest in fixed asset with interest rate of 14% per year within
5 years, interest is paid under the principal balance, principal is paid from having revenue.
Requirements:
a) Determine the annual cash flow for the project.
b) Use IRR to help the company make decision.

More information:
TOPICS FOR DISCUSSION:

1. OVERVIEW OF DBs IN THE WORLD: 2017 global survey etc.

2. OVERVIEW OF VDB
3. OVERVIEW OF CHINA DEVELOPMENT BANK
4. Role of DBs in promoting Green finance/green banking: global experiences and policy
implications for Vietnam
5. Development projects: financial and social perspectives: prefer group of projects such as
green energy projects, infrastructure projects…
6. CAPITAL MOBILIZING OF VDB AND VBSP
7. OTHERS: AIIB, BRICS…

Requirements for each topic:

- Timeline: proposals submission: 10/01/2024; Word+slides submission: 15/02/2024.
- Should be at least 20-25 pages in length (word document)
- Data should be collected from official sources: WB, State bank of Vietnam, GSO, Annual report of
development banks…
- Should have videos, 5-10 questions during the presentation: Prefer Kahoot!
- Should have some comparisons between selected banks and other banks in Vietnam
- Should include the legal framework/ policies in the presentation
- Should have international experiences.
- PLEASE MAKE ME SURPRISE!