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    CF Assign

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    Khanh Linh
    The document analyzes an investment project by calculating its: 1) NPV of 613,025,700.87 VND, indicating the project should be accepted. 2) IRR of 61%, which is above the required rate of return of 20%. 3) Sensitivity analysis shows a 1% increase/decrease in sales changes the NPV by 4.69%, while a 1% increase/decrease in fixed costs changes the NPV by -2.88%.

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    CF Assign

    Uploaded by

    Khanh Linh
    25 views7 pages
    The document analyzes an investment project by calculating its: 1) NPV of 613,025,700.87 VND, indicating the project should be accepted. 2) IRR of 61%, which is above the required rate of return of 20%. 3) Sensitivity analysis shows a 1% increase/decrease in sales changes the NPV by 4.69%, while a 1% increase/decrease in fixed costs changes the NPV by -2.88%.

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    The document analyzes an investment project by calculating its: 1) NPV of 613,025,700.87 VND, indicating the project should be accepted. 2) IRR of 61%, which is above the required rate of return of 20%. 3) Sensitivity analysis shows a 1% increase/decrease in sales changes the NPV by 4.69%, while a 1% increase/decrease in fixed costs changes the NPV by -2.88%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    25 views7 pages

    CF Assign

    Uploaded by

    Khanh Linh
    The document analyzes an investment project by calculating its: 1) NPV of 613,025,700.87 VND, indicating the project should be accepted. 2) IRR of 61%, which is above the required rate of return of 20%. 3) Sensitivity analysis shows a 1% increase/decrease in sales changes the NPV by 4.69%, while a 1% increase/decrease in fixed costs changes the NPV by -2.88%.

    Copyright:

    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 7

    III.

    Analysis

    1. Compute NPV, IRR and Payback period

    Based on Pro forma statement, we calculate NPV, IRR and payback period to make a decision
    that we should invest in this project or not.

    Calculating the operating cash flow each year

    Year 1 Year 2 Year 3 Year 4 Year 5


    Net income (233,280,000) 187,890,000 379,725,000 530,115,000 755,700,000

    Depreciation 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000

    OCF (203,280,000) 217,890,000 409,725,000 560,115,000 785,700,000

    The total cash flow for each year of this project

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5


    Operating  
    cash flow (203,280,000) 217,890,000 409,725,00 560,115,000 785,700,000
    0
    Change in        
    NWC (70,000,000) 70,000,000
    Capital          
    Spending (150,000,000)
    Total
    project (220,000,000) (203,280,000) 217,890,000 409,725,00 560,115,000 855,700,000
    cash flow 0

    NPV 613,025,700.87
    IRR 61%
    Payback period 2.0051 years
    The net present value of this expanding project is 613,025,700.87 VND and Internal rate of
    return is 61% (is greater than the required rate of return of 20%). Thus, we should accept this
    project.

    2. “What if” analysis

    2.1. Sensitivity analysis

    In this case, we want to find out the effect of a company’s sales and fixed cost on its profit. The
    analysis will isolate each of these sales and fixed costs and record the possible outcomes.

    Base scenario
    The cash flow for each year of this project
    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

    Sale Revenue 601,560,000 1,203,120,000 1,503,900,000 1,704,420,000 2,005,200,000


    Fixed cost 787,600,000 787,600,000 787,600,000 787,600,000 787,600,000
    Variable cost 95,000,000 135,000,000 180,000,000 180,000,000 180,000,000
    Depreciation 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
    EBIT (311,040,000) 250,520,000 506,300,000 706,820,000 1,007,600,000
    Tax (25%) (77,760,000) 62,630,000 126,575,000 176,705,000 251,900,000
    Net Income (233,280,000) 187,890,000 379,725,000 530,115,000 755,700,000
    Operating (203,280,000) 217,890,000 409,725,000 560,115,000 785,700,000
    cash flow
    Change in (70,000,000) 70,000,000
    NWC
    Capital (150,000,000)
    Spending
    Total project (220,000,000) (203,280,000) 217,890,000 409,725,000 560,115,000 855,700,000
    cash flow
    Require return 20%
    613,025,700.8
    NPV (VND) 7
    IRR (VND) 61%

    Assume that sales will be 1% higher/lower than baseline values. Provided other inputs remain
    constant, the cash flows will be as follows:

    Higher case:

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5


    101% Sale Revenue 607,575,600 1,215,151,200 1,518,939,000 1,721,464,200 2,025,252,000
    Fixed cost 787,600,000 787,600,000 787,600,000 787,600,000 787,600,000
    Variable cost 95,000,000 135,000,000 180,000,000 180,000,000 180,000,000
    Depreciation 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
    EBIT (305,024,400) 262,551,200 521,339,000 723,864,200 1,027,652,000
    Tax (25%) (76,256,100) 65,637,800 130,334,750 180,966,050 256,913,000
    Net Income (228,768,300) 196,913,400 391,004,250 542,898,150 770,739,000
    Operating (198,768,300) 226,913,400 421,004,250 572,898,150 800,739,000
    cash flow
    Change in (70,000,000) 70,000,000
    NWC
    Capital (150,000,000)
    Spending
    Total project (220,000,000) (198,768,300) 226,913,400 421,004,250 572,898,150 870,739,000
    cash flow
    Require return 20%
    NPV (VND) 641,787,594.97
    % change in NPV 4.69%
    Sensitivity of NPV 4.69

    Lower case:

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5


    99% Sale Revenue 595,544,400 1,191,088,800 1,488,861,000 1,687,375,800 1,985,148,000
    Fixed cost 787,600,000 787,600,000 787,600,000 787,600,000 787,600,000
    Variable cost 95,000,000 135,000,000 180,000,000 180,000,000 180,000,000
    Depreciation 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
    EBIT (317,055,600) 238,488,800 491,261,000 689,775,800 987,548,000
    Tax (25%) (79,263,900) 59,622,200 122,815,250 172,443,950 246,887,000
    Net Income (237,791,700) 178,866,600 368,445,750 517,331,850 740,661,000
    Operating (207,791,700) 208,866,600 398,445,750 547,331,850 770,661,000
    cash flow
    Change in (70,000,000) 70,000,000
    NWC
    Capital (150,000,000)
    Spending
    Total project (220,000,000) (207,791,700) 208,866,600 398,445,750 547,331,850 840,661,000
    cash flow

    Require return 20%


    NPV (VND) 584,263,806.78

    % change in NPV -4.69%

    Sensitivity of NPV -4.69


    => An increase in the sales price by 1% will result in an increase in the NPV by 4.69%, and if the sales
    price drops by 1%, the NPV of a project will decrease by 4.69%.

    Assume that fixed cost will be 1% higher/lower than baseline values. Provided other inputs
    remain constant, the cash flows will be as follows:

    Higher case:

    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5


    Sale Revenue 601,560,000 1,203,120,000 1,503,900,00 1,704,420,000 2,005,200,000
    0
    101% Fixed cost 795,476,000 795,476,000 795,476,000 795,476,000 795,476,000
    Variable cost 95,000,000 135,000,000 180,000,000 180,000,000 180,000,000
    Depreciation 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
    EBIT (318,916,000) 242,644,000 498,424,000 698,944,000 999,724,000
    Tax (25%) (79,729,000) 60,661,000 124,606,000 174,736,000 249,931,000
    Net Income (239,187,000) 181,983,000 373,818,000 524,208,000 749,793,000
    Operating cash (209,187,000) 211,983,000 403,818,000 554,208,000 779,793,000
    flow
    Change in (70,000,000) 70,000,000
    NWC
    Capital (150,000,000
    Spending )
    Total project (220,000,000 (209,187,000) 211,983,000 403,818,000 554,208,000 849,793,000
    cash flow )

    Require return 20%


    595,360,154.
    NPV (VND) 96

    % change in NPV -2.88%

    Sensitivity of NPV -2.88

    Lower case:
    Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
    Sale Revenue 601,560,000 1,203,120,000 1,503,900,000 1,704,420,000 2,005,200,000
    99% Fixed cost 779,724,000 779,724,000 779,724,000 779,724,000 779,724,000
    Variable cost 95,000,000 135,000,000 180,000,000 180,000,000 180,000,000
    Depreciation 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
    EBIT (303,164,000) 258,396,000 514,176,000 714,696,000 1,015,476,000
    Tax (25%) (75,791,000) 64,599,000 128,544,000 178,674,000 253,869,000
    Net Income (227,373,000) 193,797,000 385,632,000 536,022,000 761,607,000
    Operating (197,373,000) 223,797,000 415,632,000 566,022,000 791,607,000
    cash flow
    Change in (70,000,000) 70,000,000
    NWC
    Capital (150,000,000)
    Spending
    Total project (220,000,000) (197,373,000) 223,797,000 415,632,000 566,022,000 861,607,000
    cash flow

    Require return 20%


    NPV (VND) 630,691,246.78
    % change in NPV 2.88%

    Sensitivity of NPV 2.88

    => This means that with an increase in fixed costs of 1%, the NPV of a project will decrease by
    2.88%, and vice versa, if fixed costs are reduced by 1%, the NPV will increase by 2.88%

    ❖ Sensitivity analysis shows that the NPV of a project are most vulnerable to the

    change in the sales price and less vulnerable to the change in fixed costs.
    ❖ As above, we should estimate the sales price as accurately as possible because they have the
    greatest impact on the net present value of a project.

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