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.