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Case Study

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0% found this document useful (0 votes)
35 views5 pages

Case Study

Uploaded by

ntdung0403
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CASE STUDY

PROJECT APPRAISAL
Format: online
Weight: 20%
Due date of submission: 23 December 2021
Individual work
Submission guide:
o Submit 2 files: one in word format and one in excel format. Word file
presents the content of case study, while excel file demonstrates data
processing and analyzing in excel.
Request:
Read the following scenario and answer the questions that follow.
PRODUCTION EXPANSION PROJECT
Quang Trung Company is a company specializing in manufacturing, researching and developing
software and computers in Vietnam. The marketing department believes that it is necessary to add
more computer production capacity to meet the increasing demand of the market due to online
working/learning during Covid-19. In order to meet the increasing demand, the company will build
a new factory worth USD 18 million suitable for the company's production expansion needs. The
factory belongs to depreciation group G (25 years- Appendix 1: TT 45/2013/TT-BTC) and is
depreciated using the straight-line method. The factory is built on the company's existing land.
That land has the current market rental price before tax of 700,000 USD/year.
Machinery and equipment for production is also purchased and installed according to the
company's requirements. The company's equipment and machinery belong to the B-9 group of
depreciation (7 years) and has a value of $7.5 million. Transportation, installation, and testing costs
are $0.5 million in total.
The design capacity of the machine is 25,000 products/year. Based on the results of market
research, it is expected that the project will invest in 1 year, exploit and operate in the next 6 years
with a mobilized capacity of 55%, 60%, 80%, 85%, 75%, 70% respectively. The selling price of
each product is 1.300 USD. Production cost on a product excluding depreciation accounts for 50%
of the selling price. Annual selling and administrative expenses include $500.000 fixed costs and
variable costs as 7% of sales.
For the project to come into operation, working capital needs at the end of year are as follows.
Cash demand and receivables account for 15% and 20% of revenue, respectively; accounts payable

CASE STUDY | Project Appraisal


accounts for 40% of production costs excluding depreciation. Demand for inventory accounted for
15% of production for the period. The project uses the FIFO method to calculate cost of goods
sold.
The corporate income tax rate is currently 20%. The company currently has a capital structure of
40% debt and 60% equity. Ther firm’s debt currently has an interest rate of 10%/year. The beta of
the company equity is 1.7. Expected return on 5-year government bonds is 3%/year, market
expected return is 13%/year.
Investment capital, land rental price, product selling price, production costs, selling and
administrative expenses and cost of captial are all estiamted based on the beginning of year 1 price.
The projected inflation rate is 0%.
Requirements:
1. Based on TT 45/2013/TT-BTC, are the machinery and equipment for production qualified
to be depreciated using the declining balance method? Why? If yes, determine the
adjustment factor to calculate depreciation for machinery and equipment.
2. You are considering a depreciation method for the machinery and equipment: straight-line
depreciation or declining balance depreciation, which method would you choose, and why?
Then, build the investment plan and the depreciation plan of the project.
3. Build the forecasted income statements of the project
4. Build the plan of working captial requirement
5. Estimate cash flows of the project based on all-equity point of view (AEPV).
6. At this point, the capital structure of the project follows the capital structure of the
company, build the principal and interest repayment plan for each of those loan terms:
 Equal payments
 Equal instalments (principal repayment)
 One year of instalment-free period and equal payments for the remaining period
If you were given a choice of payment method, which would you prefer? Why?
Given the estimated cash flows from question 5, what form of repayment would you
recommend?
7. Now, with the payment method you chose in question 6, calculate NCF_TIP, NCF_D and
NCF_EPV.
8. Calculate the average DCSR and DCSR for each year. The bank requires the average
DSCR not less than 1.3 and the annual DSCR not less than 1.2. The bank also provides a
form of interest rate as follows:

CASE STUDY | Project Appraisal


Debt / total investment Interest rate
<=40% 10%
<=50% 12%
<=60% 14%
>60% 15%

Calculate the maximum debt ratio that the bank can lend to ensure the debt payment
safety ratio within the allowable level.
Based on the available information, propose a capital structure for the project.
9. Calculate the project's discount rate based on the proposed capital structure in question 8
10. Calculate NPV, IRR, PP, P/I, ARR of the project acording to AEPV, TIP and EPV.
11. Predict inflation rate during the project's operating period based on available information
of Vietnam’s macro-economics. Then, recalculate the project's cash flows and its
performance under calculated inflation.
12. Consider the following real options and re-analyze the project when there is a real option.
The project appraisal team has the following scenario data:
Table 2: Project’s scenarios
Scenario Prob. Production Price Inflation Inventory/
cost/ production
sales
Reliable best case 25% 41% 1450 3% 10%

Normal case 50% 50% 1300 5% 15%

Reliable worst case 25% 62% 1100 7% 20%

Option to abandon
After 1 year, in case the bad situation occurs, the investor can abandon the project,
the liquidation value is equal to the remaining book value. Using a decision tree,
calculate the value of this real option and re-evaluate the project.

Option to delay
The project owner can delay the project up to one year to get more information
about the project (macro, micro...). If after 1 year the information is as expected
(base case) or better than expected (good case), the project will proceed, However,
due to more competition after 1 year, the operating cash flow will decrease by 5%.
If bad information occurs (reliably bad situation), the investor will not implement

CASE STUDY | Project Appraisal


the project. Using a decision tree, calculate the value of the option and re-evaluate
the project.

Option to grow
The project team believes that the project implementation will create opportunities
for the investor to carry out other potential next investment projects when
conditions are favorable (good case). Other potential investment projects that can
be implemented at the end of year 6 (the year of project completion) and generated
a NPV at the end of year 6 at 15 million USD. Using a decision tree, calculate the
value of the growth option and re-evaluate the project.

13. Project risk analysis. Analyse the projects’ risk using sensitivity, situation and simulation
methods. From there, assess the project's risks, identify important risk sources, and propose
risk-control plans.

Hints:
Sensitivity analysis: define 90% range of paramaters and using excel tool (data
table) to conduct sensitivity analysis
Situation analysis: define the project’s scenarios (e.g. Table 2), then using excel
tool (scenario manager) to conduct situation analysis
Simualtion: define appropriate paramaters’ distribution and their correlation
matrix, then using Crystal ball software, run simulations 10,000 times of project
scenarios. From there, comment on the profitability and risks of the project; identify
the important factors affecting the risk of the project.
Example of a parameter distribution and correlation matrices are as follows:

Table 3. Parameters’ distribution


Parameters Distribution Mean Standard Min Max
deviation
Selling price per unit lognormal 1300 300
Production cost/selling triangle 50% 40% 65%
price
……………

Table 4. Parameters’ Correlation matrix


No. Parameters 1 2 3 4…
1 Selling price per unit 1 -0.25 … …

CASE STUDY | Project Appraisal


2 Production cost/selling -0.25 1 … …
price
3 X3 … … 1
4… X4 … … 1

14. Conclusion of the project and as a investor, which decision will you make regarding this
project?

-----------------------End----------------------

CASE STUDY | Project Appraisal

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