Chapter 12

STUDY CASE
FOR SUSTAINABLE
INVESTMENT PROJECT
SELECTION
Company history
The company Mediator CSB SA is a joint stock company founded on 1st of august
2000. The domain of activity is the production of different plastic products with
resources obtained from recycling waste. Presently, the company Mediator CSB SA
has 98 employees from which:
• management 7,
• direct workforce 60,
• indirect workforce 20,
• technical and administrative workers 10,
• outside consultants 1.
The main activity indicators are:
Ö Annual turnover: 320 mld. lei (1euro = 40000 lei)
Ö Social Capital: 120 mld. lei
Ö Assets: 100 mld. lei
Ö Income / Assets 1000 lei / 1400 lei

− Study case no. 1

Initial data
The profit rate is 50%, and the profit structure is:
• For dividends: 20%,
• Net investments: 50%,
• Working capital 30%,
• Amortization rate is 30%,
• Depreciation rate is 8 %,
• Acquisition rate is 7 %,
• Net investment: 5 mld. lei,
Study case for sustainable investment project selection

• Forecasting horizon:3 years.

The problem

Determine if the society is going well or bad and if is going bad what shall we do
to solve the situation.

Problem solving

The company has three variants of project improving investments for improving its
activity. These variants are:

Indicators/Variants I II III
Di (Dividends) d1=20% d2=20% d3=15%
Ii (Investments) i1=50% i2=50% i3=60%
Ci (Costs) c1=30% c2=30% c3=25%
Vi (Incomes) v1=1400 v2=1600 v3=1200
Table 12.1

Variant I

Forecasting CFh,
year CFh Vh Ph Dh INh CCh Ah SFh IBh ITh PFh Inet h h-1
1 100,00 140,00 46,67 9,33 23,33 14,00 30,00 8,00 53,33 58,33 37,33 21,00 29,33
2 129,33 181,07 60,36 12,07 30,18 18,11 38,80 10,35 68,98 92,31 48,28 44,03 37,94
3 167,27 234,18 78,06 15,61 39,03 23,42 50,18 13,38 89,21 119,39 62,45 56,94 49,07

Table 12.2

Forecasting CFh,
year CFh Vh Ph Dh INh CCh Ah SFh IBh ITh PFh Inet h h-1
1 100,00 160,00 53,33 10,67 26,67 16,00 30,00 8,00 56,67 61,67 39,67 22,00 31,67
2 131,67 210,67 70,22 14,04 35,11 21,07 39,50 10,53 74,61 101,28 52,23 49,05 41,69
3 173,36 277,38 92,46 18,49 46,23 27,74 52,01 13,87 98,24 133,35 68,77 64,58 54,90

Table 12.3

Mathematical formula that has been used:

Forecasting CFh,
year CFh Vh Ph Dh INh CCh Ah SFh IBh ITh PFh Inet h h-1
1 100,00 120,00 40,00 6,00 24,00 10,00 30,00 8,00 54,00 59,00 37,80 21,20 29,80
2 129,80 155,76 51,92 7,79 31,15 12,98 38,94 10,38 70,09 94,09 49,06 45,03 38,68
3 168,48 202,18 67,39 10,11 40,44 16,85 50,54 13,48 90,98 122,13 63,69 58,45 50,21

Table 12.4
Study case for sustainable investment project selection

• Ph=Vh*p/1+p

• Dh=di*Ph

• INh=ii*Ph

• CCh=ci*Ph

• Ah=a*CFh

• SFh=α*CFh

• IBh=INh+Ah

• ITh=IBh+Ineth-1

• PFh=β*IBh

• Ineth=ITh*PFh

• CFh,h-1=PFh-SFh

where,
CFh = Assets in year h;
Vh = Incomes in year h;
Ph = profit in year h;
Dh = dividendes in year h;
INh = Net investments in year h;
CCh = Working Capital in year h;
Ah = amortization in year h;
SFh = assests that have been removed;
IBh = Brut investments in year h;
ITh = Total investments in year h;
PFh = aquisitions in year h;
Ineth = unfinished project investments in year h;
CFh,h-1 = the modification of capital assets from year h-1 to year h;
P = profit rate:
Di = dividends to profit ratio;
ii = Investments to profit ratio;
ci = Working Capital to profit ratio;
a = amortization rate;
α = coeficient for aquisitions;
β = coeficient for assets replacing.
 Investments and risks for sustainable development

The analysis
Analysing the resulted data from table 1 we could say that the best variant is
variant II as the modification of capital assets is higher (31,67 in the first year,
41,69 in the second and 54,90 in the third) and the value of capital assets in the 3rd
year is 173,36 mld. lei.
The second selected isvariant II as the value of capital assets is 168,48 mld. lei, and
the last variant is variant III, where the capital assets is 167,27 mld. lei. As a result,
the order of project investments is: variant II, variant III and then variant I.
If we analyse the investments from the turnover point of view, the best variant is
the second because the income in the third year will be 277,38 mld. lei (in the year
1 was of 160 mld. lei, and in the second year was of 210,67 mld. lei). The second
proposed variant of investment is variant I as the income in the 3rd year is
234,18 mld. lei (in the first year the turnover was of 140 mld. lei, and in the second
year was 181,07 mld. lei). The third selected variant of investment project is
variant III where the income in the 3rd year is 202,18 mld. lei. Results that from
the point of view of forecasting, the project investments selection will be:
variant II, variant I and variant III.
From the forecasted profit perspective we’ll note that the order of variants is
variant II, variant I and variant III. In the variant II, the profit rise from
53,33 mld. lei in year 1 to 70,22 mld. lei in year 2 and to 92,46 mld. lei in year 3. In
variant I, the profit rise from 46,67 in the first year to 60,36 in the second and to
78,06 in the third. In the variant III, the profit is 40 mld. lei in the year 1 and rise
from 51,92 mld. lei in year 2, reaching to 67,39 mld. lei in the third year.
Results that generally the second variant of project investment is the best.
The graphical reprezentation is presented in the next figures (figure 12.1):

100,00

80,00
Series1
60,00
profit

Series2
40,00
Series3
20,00

0,00
1 2 3

year
an

Graphic 12.1
Study case for sustainable investment project selection

− Study case no 2

Hypotesis:
- The forecasting profit for the next three years is a medium profit;
- The income is also the forecasted medium turnover, over the next three years.
The problem
We have to find which is the optimum variant of projects starting taking into
account the following indicators:

Variant
No Indicators M.u. I II III
1 Production capacity units 21000 24000 18000
2 Annual turnover mld. lei 185,08 216,01 159,31
3 Annual production costs mld. lei 123,39 144,01 106,21
4 Annual profit mld. lei 61,69 72,00 53,10
5 No. of employees No. of pers 117 90 80
6 Management No. of pers 7 7 7
7 Direct working employees No. of pers 100 83 73

Table 12.5

We have to find out:

a) The required value of investments,
b) Specific investment,
c) Payback period,
d) Economic efficiency ratio,
e) Total cost of investment project,
f) Specific costs of investment project.
Variant
No. Indicator M.u. I II III
1 Production capacity pc 21000 24000 18000
2 Annual turnover mld. lei 185,08 216,01 159,31
3 Annual costs mld. lei 123,39 144,01 106,21
4 Annual profit mld. lei 61,69 72,00 53,10
5 No of employees no pers 117 90 80
6 Management no pers 7 7 7
7 Direct workers no pers 100 83 73
8 Investments mld. lei 74 80 68
9 From which construction works mld. lei 44,4 48 40,8
10 Specific investment- product based mld. lei/unit 3,524 3,333 3,778
Specific investment-value based lei invest/ 1 leu
11 production 0,400 0,370 0,427
 Investments and risks for sustainable development

Variant
No Indicatori M.u. I II III
12 Payback years 1,20 1,11 1,28
13 Economic efficiency ratio 0,83 0,90 0,78
14 Project investment useful life years 20 20 20
15 Costs recalculated
16 Product unit based lei/f.u. 0,00605 0,00617 0,00609
17 lei/f.u. 0,0088 0,0090 0,0089
18 lei/f.u. 1,5000 1,5000 1,5000
19 Product value based lei 2541,761 2960,198 2192,162
20 lei 222 240 204
21 lei inv/lei ch 1,030 1,028 1,032
Net present value ratio lei profit net/ 6,3315 6,8355 5,9308
22 1 leu invest

Table 12.6

Mathematical relation that have been used are:

• Specific capital investment=Investment costs/Production capacity

• Value of the capital investment=Investment costs/Annual turnover
• Payback period=Investment costs/Annual profit
• Efficiency ratio=1/Payback period
• Specific invested capital:
- Kfh=(Ih+Ch*Def)/Def*qh
- Kfh=(Ih++Ch*Tr)/Tr*qh
- Kfh=(Ih+Ch*Tr)/Ch*Tr
• Total investment project costs:
- Kvh=Ih+Ch*Def
- Kvh=Ih+Ch*Tr
- Kvh=(Ih+Ch*Def)/Ch*Def
• Net Present Value ratio=(Def*Ph/Ih)-1

where,
Kfh = Product costs unit based;
Kvh = Value costs;
Ih = Annual investment;
Ch = Annual production and maitenance costs;
Def = Investment project useful life;
Tr = Payback period;
Qh = Production capacity.
Study case for sustainable investment project selection

Economic analysis

We note that if we relate the investment project with the production capacity the
ratio must be minimum. Therefore, the variant II is the optimum investment. That
means the lowest investment costs for more products (3,333 mil lei/unit), and
lowest investments for money spent with production (an effort of 0,370 lei for 1 leu
production capacity). This situation is characteristic to the mass production. Is not
the same case for luxury goods production.

If the main indicator for investment project selection is the payback period we’ll
note that the feasible payback period is for variant II.

From the point of view of economic efficiency, the optimum variant is the
variant II (brings the highest profit to an invested monetary unit (i.e. 1 leu) and
followed by variant I and the last variant III.

In what it concern the Net Present Value of investment ratio, variant II is the most
efficient as it brings the highest return for 1 leu invested.
As a conclusion, the variant II is the feasible variant of investment project.

− Study case no 3

The company Mediator CSB SA wants to develop its activity. Therefore, it analyses
three variants of proiects:

Variant
Measure
No. Measures unit I II III
1 Production capacity units 21000 24000 18000
2 Annual turnover mld. lei 185,08 216,01 159,31
3 Production costs mld. lei 123,39 144,01 106,21
4 Useful life year 20 20 20
Project design and constructions
5
time year 2 2 2
6 Investment costs mld. lei 74 80 68
year 1 mld. lei 44 48 41
year 2 mld. lei 30 32 27
Table 12.7

The criteria of the analysis will be:

1. Invested capital,
2. Opportunity costs of capital product unit based,
3. Economic efficiency,
 Investments and risks for sustainable development

4. Discounted Net Present Value of Investment.

We put the results of the analysis in the following table:

Variant
No. Measures Measure unit
I II III
1 Invested capital mld. lei 59,2 64 54,4
2 Opportunity costs of capital 17,76 19,2 16,32
product unit based
3 Capital economic efficiency 0,24 0,24 0,24

Table 12.8

1. Invested capital
We determine the total invested capital with the formula:
Mi = ∑Ih(d-h+1)/d, where
Ih = Investment in the year h;
d = time to perform the project design and feasibility studies;
h = the year of the analysis

M1 = 44(2-1+1)/2 + 30(2-2+1)/2 = 59,2 mld. lei

M2 = 48(2-1+1)/2 + 32(2-2+1)/2 = 64 mld. lei
M3 = 41(2-1+1)/2 + 27(2-2+1)/2 = 54,4 mld. lei

Analysing the variants of projects on invested capital base, the feasible variant is
the variant III and then I and II.

2. Opportunity costs of capital product unit based

We’ll use the relation:

It = Mi*a*d, where
It = total investment costs
a = discounting ratio = 15 %
It1 = 59,2*0,15*2 = 17,76 invested lei/product unit
It2 = 64*0,15*2 = 19,2 invested lei/product unit
It3 = 54,4*0,15*2 = 16,32 invested lei/product unit

Analysing the investment projects from this aspect, we’ll observe that the variant II
will be also most feasible as it has the highest value (19,2).
Study case for sustainable investment project selection

3. Economic efficiency ratio

The formula is:

ei = It / Ii, where
ei = economic efficiency of 1 leu capital employed
Ii = Investments costs in variant i (i= 1-3)

e1 = 17,76 / 74 = 0,240
e2 = 19,2 / 80 = 0,240
e3 = 16,32 / 68 = 0,240

Analysing the correspondent variants for investment projects from the economic
efficiency ratio perspective, we’ll note that the three variants presents a similar
value (0,24). what means that the result is not concludent.

4. Discounted Net Present Value of Investment

A. Discounting at the beginning of construction works, we’ll obtain the

Discounted Net Present Value of Investment:

Ract = (Pact / Iact) – 1

Iact = ∑Ih*1/(1+a)h
Pact = ∑Ph*1/(1+a)h=Ph*[1/(1+a)d]*{[(1+a)D-1]}/(1+a)d*a
where,
Ract = Discounted Net Present Value of Investment:
Pact = Discounted profit
Iact = Discounted investment

Measure Variant
No. Measure
unit I II III
1 Discounted investment mld. 60,99 65,94 56,05
From which:
year I mld. 38,61 41,74 35,48
year II mld. 22,38 24,20 20,57
2 Discounted profit mld. 291,99 340,80 251,34
3 Discounted Net Present 3,79 4,17 3,48
Value of Investment:
Table 12.9
 Investments and risks for sustainable development

a) IactI=44*1/1,15+30*1/1,15²=60,99 mld. lei

b) IactII=48*1/1,15+32*1/1,15²=65,94 mld. lei

IactIII=41*1/1,15+27*1/1,15²=56,05 mld. lei

PactI=61,69*1/1,15²*(16,366-1)/16,366*0,15=291,99 mld. lei

PactII=72*1/1,15²*(16,366-1)/16,366*0,15=340,80 mld. lei

PactIII=53,10*1/1,15²*(16,366-1)/16,366*0,15=251,34 mld. lei

c) RactI=(291,99/60,99)-1=3,79

RactII=(340,80/65,94)-1=4,17

RactIII=(251,34/56,05)-1=3,48

B. Discounting at the investment project start-up

We use the following formulas:

Ract=(Pact/Iact)-1
Iact=∑Ih*(1+a)h

Pact=∑Ph*1/(1+a)h=Ph*[(1+a)D-1]/[(1+a)D*a]

Measure Variant
No. Measure
unit I II III
1 Discounted investment mld. lei 81 87 74
From which:
Year 1 mld. lei 51,06 55,20 46,92
Year 2 mld. lei 30 32 27
2 Discounted profit mld. 386,16 450,70 332,40
Discounted Net Present Value
3 of Investment: 3,79 4,17 3,48
Table 12.10

a) IactI=44*1,15¹+30*1,15º=81 mld. lei

IactII=48*1,15¹+32*1,15º=87 mld. lei
IactIII=41*1,15¹+27*1,15º=74 mld. lei
Study case for sustainable investment project selection

b) PactI=61,69*6,259=386,16 mld. lei

PactII=72*6,259=450,70 mld. lei
PactIII=53,1*6,259=332,40 mld. lei

c) RactI=(386,16/93)-1=3,79
RactII=(450,70/100)-1=4,17
RactIII=(332,40/85)-1=3,48

Economic analysis:

As we could easy observe, Discounted Net Present Value of Investment is

changing comparing with the reference moment for discounting
(RactI-A=RactI-B=3,79; RactII-A=RactII-B=4,17; RactIII-A=RactIII-B=3,48).

C. Discounting at the investment project object out of service moment

In this case, the mathematical formula will be:

Ract=(Pact/Iact)-1

Iact=∑Ih(1+a)h

Pact=∑Ph(1+a)h
The results of the analyse are in the next table:

Measure Variant
No. Measure
unit I II III
1 Discounted investment mld. lei 1518,14 1641,24 1395,05
From which:
Year 1 mld. lei 961,03 1038,95 883,11
Year 2 mld.lei 557,12 602,29 511,95
2 Discounted profit mld.lei 7268,18 8482,91 6256,19
Discounted Net Present 3,79 4,17 3,48
3 Value of Investment:
Table 12.11

Investments
a) IactI=44*21,645+30*18,821=1518,14 mld. Lei

IactII=48*21,645+32*18,821=1641,24 mld. lei

IactIII=41*21,645+27*18,821=1395,05 mld. lei

 Investments and risks for sustainable development

Profit
b) PactI=61,69*[(16,366-1)/0,15]=7268,18 mld. lei

PactII=72*[(16,366-1)/0,15]=8482,91 mld. lei

PactIII=53,10*[(16,366-1)/0,15]=6256,19 mld. lei

Discounted Net Present Value of Investment:

c) RactI=(7268,18/1518,14)-1=3,79

RactII=(8482,91/1641,24)-1=4,17

RactIII=(6256,19/1395,05)-1=3,48

Economic analysis

Analysing the upmentioned measures, we’ll get the conclusion that the optimum
variant is variant II as the Discounted Net Present Value of Investment is 4,17
comparing with 3,79 in variant I and 3,48 in variant III.

− Study case no. 4

We want to determine if the project of Mediator CSB SA is feasible according to

banks methodologies (BRD, BCR, IBRD, EBRD, IMF, World bank etc.)

Variant
Measure
No. Indicator I II III
unit
1 Investment costs mld. lei 74 80 68
year 1 mld. lei 44 48 41
year 2 mld. lei 30 32 27
2 Annual turnover mld. lei 220 210 190
3 Production costs mld. lei 123,39 144,01 106,21
4 Investment object useful life year 20 20 20
5 Forecasted incoms mld. lei 185,08 216,01 159,31
6 Fixed costs mld. lei 24,15 23,80 19,89
7 Variable costs mld. lei 99,24 120,21 86,32
Table 12.12

The IBRD indicators to be determined are:

1. Discounted benefits/Discounted costs
2. Net Present Value (NPV)=Discounted benefits – Discounted costs
3. Internal rate of return (IRR) =amin+(amax-amin)*NPV(+)/[NPV(+)+|NPV(-)|]
Study case for sustainable investment project selection

4. Breakeven point=(Fixed costs/Annual Turnover-Variable Costs)*100 %

5. Discounted Cash Flow

Obtained results are in the following table:

No. Indicator M.u. I II III
1 Discounted incomes mld. lei 1041,25 993,92 899,26
2 Discounted costs mld. lei 644,94 747,53 558,76
3 d.i / d.c mld. lei 1,614 1,33 1,609
4 NPV mld. lei 396,31 246,39 340,5
5 IRR 86,37% 60,57% 82,45%
6 Breakeven Point 19,99 26,51 19,18
Table 12.13

Discounted benefits (incomes)=∑Vh/(1+a)h; h=1,…,22

Discounted costs=∑(Ih+Ch)/(1+a)h; h=1,…,22

We’ll make a comparative analysis for the investment projects in the three variants
in order to select the most feasible one:

Variant I of investment project

Investment and Discounted Discounted

Year incomes a=15%
production costs costs incomes
1 44 0,87 38,26
2 30 0,76 22,68
years 123,39 220 4,73 584,00 1041,25
3-22
Total 644,94 1041,25
Table 12.14

Discounted benefits/Discounted costs =1041,25/644,94=1,614

Net Present Value (NPV)=Discounted benefits – Discounted costs =1041,25-

644,94=396,31

Conclusion of the analysis:

The project from variant I is acceptable as is completing the requirment R>1, that
means that for an invested monetary unit of 1 leu we’ll obtain 1,614 lei incomes,
so the firm will recover the invested capital and will work on profit.
 Investments and risks for sustainable development

Variant II of investment project

Investment and Discounted Discounted

Year Incomes a=15%
production costs costs incomes
1 48 0,87 41,74
2 32 0,76 24,20
years 144,01 210 4,73 681,59 993,92
3-22
Total 747,53 993,92
Table 12.15

Discounted benefits/Discounted costs =993,92/747,53=1,33

Net Present Value (NPV)=Discounted benefits – Discounted costs = 993,92-

747,53=246,39

Conclusion of the analysis:

In the second variant the project will be also acceptable as R>1, that means that
for an invested monetary unit of 1 leu we’ll obtain 1,614 lei incomes, so the firm
will recover the invested capital and will work on profit.

Variant III of investment project

The resulted data are presented in the next table:

Investment and Discounted Discounted
Year Incomes a=15%
production costs costs incomes
1 41 0,87 35,65
2 27 0,76 20,42
years 106,21 190 4,73 502,69 899,26
3-22
Total 558,76 899,26
Table 12.16

Discounted benefits/Discounted costs =899,26/558,76=1,609

Net Present Value (NPV)=Discounted benefits – Discounted costs =899,26-

558,76=340,5

Conclusion of the analysis:

In the third variant the project will be also acceptable as R>1, that means that for
an invested monetary unit of 1 leu we’ll obtain 1,609 lei incomes, so the firm will
recover the invested capital and will work on profit.
Study case for sustainable investment project selection

As a general conclusion all theree variants of investment project are acceptable, so

it will be necessary a diferentiated analysis based on IRR calculations:

Internal rate of return

(IRR) =amin+(amax-amin)*NPV(+)/[NPV(+)+|NPV(-)|]

Variant I:

Let’s consider amin=85%; a max=90%

Therefore, we’ll make the analysis first for amin=85%;

Investment
Discounted Discounted
Year and production Incomes a=85%
costs incomes
costs
1 44 0,54 23,78
2 30 0,29 8,77
years1-22 123,39 220 0,34 42,41 75,62
Total 74,96 75,62
Table 12.17

The condition that NPV=75,62-74,96=0,66 mld. lei >0 is fulfilled.

Than we’ll make the same thing for a= 90 %

Investment and Discounted Discounte

Year Incomes a=90%
production costs costs d incomes
1 44 0,53 23,16
2 30 0,28 8,31
years
3-22 123,39 220 0,31 37,98 67,71
Total 69,45 67,71
Table 12.18

NPV=67,71-69,45= -1,74 mld lei <0

IRR=85%+(90%-85%)*(0,66/0,66+1,74)=0,86375

Variant II: amin= 60%; amax= 65%

For amin= 60%;
 Investments and risks for sustainable development

Investment and Discounted Discounted

Year Incomes a=60%
production costs costs incomes
1 48 0,63 30,00
2 32 0,39 12,50
years
3-22 144,01 210 0,65 93,75 136,71
Total 136,25 136,71
Table 12.19

NPV=136,71-136,25=0,46 mld lei >0

For amax=65%

Investment and Discounted Discounted

Year Incomes a=65%
production costs costs incomes
1 48 0,61 29,09
2 32 0,37 11,75
years
3-22 144,01 210 0,57 81,38 118,66
Total 122,22 118,66
Table 12.20

NPV=118,66-122,22= -3,56 mld lei <0

IRR=60%+(65%-60%)*(0,46/0,46+3,56)=0,6057
Variant III: amin=80%; amax=85%

Investment and Discounted Discounted

Year Incomes a=85%
production costs costs incomes
1 41 0,54 22,16
2 27 0,29 7,89
years
3-22 106,21 190 0,34 36,51 65,31
Total 66,56 65,31
Table 12.21

NPV=65,31-66,56= -1,25 mld lei <0

Investment and Discounted Discounted

Year Incomes a=80%
production costs costs incomes
1 41 0,56 22,78 0,00
2 27 0,31 8,33 0,00
years
3-22 106,21 190 0,39 40,98 73,30
Total 72,09 73,30
Table 12.22
Study case for sustainable investment project selection

NPV = 73,30 - 72,09 = 1,21 mld lei >0

IRR=80% + (85% - 80%)*(1,21/1,21 + 1,25) = 0,8245

The Breakeven point

We apply the relation:

Breakeven point=(Fixed costs/Annual Turnover-Variable Costs)*100 %

The results of the calculations are presented in the next table:

Variant
Indicators I II III
Fixed Costs 24,15 23,8 19,89
Variable costs 99,24 120,21 86,32
Breakeven point 19,99834 26,50629 19,18403
Table 12.23

Conclusion for breakeven analysis:

It results that the variants of investment projects I and III are very close, because
shows that at more than 20 % from production sold, the products will be feasible.

However, as the numbers are very close to the variant II and if the variant II is a
better product quality with environmental quality embedded, preference will be
given to variant II of project investment.

The discounted cash flow

The values obtained for discounted cash flow using the formula are:

Cash flow (CF)= Vh-(Ch-Ih)

Variant I: Discounted cash flow = 125,69 mld. lei

Variant II: Discounted cash flow = 152 mld. lei

Variant III: Discounted cash flow = 113,1 mld. lei

As a conclusion, variant II of investment project is the most acceptable.