PROJECT AVALUATION CRITERIA
1: 5 projects with the following information:
Name Capital requirement NPV (million Dong)
A 1350 -950
B 3400 3500
C 2080 1570
D 2000 1200
E 2600 2250
Choose projects if:
a) No budget constraints
- When there’s no budget constraints, the goal is to maximize the Net Present Value
(NPV) Choose projects with high NVP Project B, E, C
b) Budget constraint: 5 billion Dong
- When we have a budget constraint, the goal is to maximize NPV but don’t exceed the
capital requirement.
- Available budget: 5 billion Dong = 5000 million Dong
- Project B:
+ capital requirement: 3400; NPV: 3500
+ After choosing B, remaining budget will be: 5000 – 3400 = 1600 million Dong
- Since we only have 1600 million Dong left, we can only afford project A. But project
A has negative NPV, so we don’t choose project A.
The only project we can afford is project B.
2: Company A is considering two investment projects to modernize its production line. The
company plans to invest in either a forklift (project 1) or an automatic conveyor belt (project
2) to transport raw materials and semi-finished products between production departments.
The discount rate for the two projects is 12%.
Information about the two projects is given in the following tables: (Unit: thousand USD)
Table 1: Cashflows of project 1
Year 0 1 2 3 4 5 6
NCFt -52 12 18 16 14 13 12
Table 2: Cashflows of project 2
Year 0 1 2 3 4-6
NCFt -33 10 16,2 13 4,5
Which project will be selected if:
a) Based on NPV
b) Based on B/C
Answer: a) Project 1 (6,81 and 5,79 thousand USD) b) Project 2 (1,13 and 1,18)
3: Consider 2 projects X and Y with the following parameter tables, fill in the blank boxes
with the remaining quantities and make a decision to choose the project according to each
calculation criterion:
Project X Y
PV (Investment cost) 600 2000
PV(Gross benefit) 3500 5000
PV (Operating cost) 2000 1000
PV (NCF) 1500 ?
B/C (Subtract operating ? 2
costs from gross benefits)
B/C (Include operating costs 1,35 ?
in investment costs)
NPV ? ?
Answer: PV: 4000 B/C: 2,5 and 1,67 NPV: 900 and 2000
4: An investor plans to implement a BOT project to build a dental and maxillofacial hospital
for a province. The project data are as follows: (Unit: million VND, 1 year = 360 working
days)
+ Initial investment capital: 3000
+ Remaining value: 500
+ Annual operating costs: 240
+ Expected number of patients served/day: 30 people, fee 100 thousand VND/person
+ Applicable discount rate: 15%
a) Create the project's cash flow table
b) Calculate net cash flow (cash flow in - cash flow out), PV, NPV
c) Calculate the B/C ratio if annual operating costs are subtracted from gross benefits
(revenue and residual value)
d) Calculate the present value of cash flow in and present value of cash flow out (including
the base year), recalculate NPV by the sum of the present value of cash flow in and present
value of cash flow out
e) Calculate the B/C ratio if investment costs and operating costs are combined
Answer
b) PV: 3064,4 NPV: 64,4
c) 1,021
d) NPV: 64,4
e) 1,017
5: An irrigation project has NPV=118.06 (billion VND) if a 20% discount rate is applied. If
you increase the discount rate to 24%, NPV=-29.61 billion VND. Calculate the IRR of the
project using the interpolation method.
Answer: 23,19%
6: NCF of a project is as follows:
Year 0 1 2 3 4
NCF -10 5 4 3 2 (thousand USD)
a) Calculate NPV and B/C at a discount rate of 12%
b) With discount rates less than 12%, how does the predicted NPV change?
c) Calculate the IRR of the project knowing the project NPV with discount rates from
13% to 20% as follows
r 13% 14% 15% 16% 17% 18% 19% 20%
NPV 0,8632 0,6729 0,4885 0,3096 0,1360 -0,0325 -0,1961 -0,3549
Answer: a) NPV: 1,059 B/C: 1,106 c) 17,8%
7: Parameters of the 3 projects are as follows: (Unit: million VND)
Name NCF0 NCF1 NCF2 NCF3 PP (not P PP NPV B/C (Subtract
taking into (take into operating
(r=10%)
account the account costs from
time value the time gross benefits)
of money) value of
money)
A -3000 1000 2000 4000 2 y 1,7 m 2567,24 1,86
B -3000 0 3000 4000 2y2m 2484,6 1,83
C -3000 3000 1000 20000
Fill the tables
Answer : C: PP: 1 y, 1 y 4 tm, NPV: 15580, B/C: 6,2
8: A nursing home construction project has the following parameters:
- Initial investment capital: 18 billion VND
- Annual operating and management costs: 4.7 billion VND
- Annual income: 8.5 billion VND
- Economic life: 5 years
- Remaining value after 5 years: 2.5 billion VND
- Discount rate: 12%/year
(Ignore corporate income tax)
a) Prepare a cash flow statement
b) Calculate NPV and indicate whether the project should be implemented.
c) Calculate the payback period without taking into account the time value of money and
taking into account the time value of money
Answer: b) NPV is negative c) PP: 4.44
10: A project has data as shown in the table below.
Unit: million VND
Year 0 1 2 3 4-9
Factory construction 300
Purchase equipment and 950
installation
Operating costs/year 340 480 700
Income/year 450 580 920
The final year: asset liquidation was 50 million VND. Given that the project's discount rate is
12%/year
Answer:
a) Determine the value of cash flow in and cash flow out, reflected on the table
b) Calculate the total present value of cash flows in and the total present value of cash flows
out, and use this result to calculate NPV
c) Calculate the B/C benefit-cost ratio from the perspective of combining investment costs
and operating costs
d) Evaluate this investment project based on the calculation results in questions b and c
Answer: b) 3481.9 ; 3809.4 ; -327,5 c) 0,91
11: A factory that wants to increase its water use is choosing between two options:
- Option 1: Use water from the water supplier
- Option 2: Drill underground water wells
The financial data of the two projects are given in the following table:
Table: Data on two projects (Unit: million VND)
Item Option 1 Option 2
Initial investment 6 200
Annual warranty cost 0 25
Usage cost 0 32
Remaining value 0 40
Economic life expectancy 10 10
(years)
It is expected that the enterprise will need to use 40,000m3 of water every year at a price of
3,000 VND/m3. Question: Which option should the enterprise choose to save the most costs?
Given that the enterprise's cost of capital is 15%?
Answer: PV1 = 608,25 > PV2 = 476,18
12. A person invests 350 million VND with a discount factor of 13%/year to implement a
project, the annual profit and depreciation earned from the project are as follows:
- 1st year: 50 million VND.
- 2nd year: 60 million VND
- Then annually increase by 10 million VND until the 5th year, then maintain a stable level
of 90 million VND until the 30th year. After ceasing operation, the liquidation value of the
project is 80 million VND.
a) Determine the value of the project's net financial cash flow (Determine NCF, reflected on
the table)
b) Determine the net present value (NPV) and whether this person should invest in this
project.
Answer: NPV = 247.77 (million VND)
13: The company has a warehouse with a rental income (previous year) of 10 million/year.
Currently, this warehouse can be rented for 15 million/year. The company is considering a
project that, if the project goes into operation, will have to use this warehouse. How much
rental income is included in the project cash flow? Given that the corporate income tax rate is
20%.
14. Bien Hoa Confectionery Joint Stock Company (Bibica) plans to invest in two projects
producing cakes and fruit candy. Both factories have an initial investment capital of 600
million VND. The net cash flows of the two projects are as follows:
year 0 1 2 3 4
1. producing cakes -600 100 300 300 100
2. producing fruit candy -600 100 100 300 300
With a discount rate of 10% and using the net present value (NPV) criterion to evaluate the
project, in your opinion, Should Bibica company invest in the Cake Factory or the Fruit
Candy Factory, knowing that these two projects are independent to each other?
15: An investor plans to build an electronics store. Initial investment costs include:
construction costs of 3 billion and electronics purchase costs of 4 billion. At the end of each
year, it operating cost is 60 million
- Revenue at the end of year 1 is 400 million
- Revenue at the end of year 2 is 650 million
- Revenue from the end of year 3 to the end of the project life cycle is 1800 million
continuously per year.
The operational period is 20 years excluding years of construction investment. Liquidation
value is 1 billion, discount interest rate is 10%/year
a, Should the investor invest in this project or not?
b, If the investor contributes all capital (7 billion) to construction company A, he will receive
a profit of 8%/year. So should the investor build a business or contribute capital?
Answer: a) NPV = 5739.10 (million VND) b) 32626.7 (million VND)
16: There are 2 investment options with the following data:
Unit : thousand USD
Item 1 2
Equipment 1000 1500
purchase price
Cost/year 220 430
Income/year 500 700
Liquidation 200 100
Life time 5 10
Discount rate r =10%/year. Calculate NPV, B/C, PP of each project
Answer: 1: NPV: 185,60, B/C: 1,1 and 1,19 , PP; 3,57 and 4,38
2: NPV: 197,59 , B/C : 1,05 or 1,13, PP: 5,56 or 8,52
17: The net cash flow of project X has the data as shown in the following table. The total
investment capital of the project is 1500 USD. Calculate the project's payback period. Given
that the project's discount rate is 10%/year.
Year 1 2 3 4 5 6
NCF 250 350 400 500 600 700
A: 4 y 11 m
18: A project has data as shown in the table below.
Unit: million VND
Year 0 1 2 3 4-9
Factory construction 320
Purchase equipment and 250
installation
Operating costs/year 240 280 200
Income/year 450 480 420
The final year of asset liquidation was 50 million VND. Know that the project's discount rate
is 12%/year
Request:
a) Determine the value of the project's net financial cash flow (Determine NCF, reflected on
the table)
b) Determine the discounted payback period of the project
c) Calculate the net present value (NPV) and the present value of the benefit-cost ratio
B/CĐánh giá dự án đầu tư này dựa trên kết quả tính toán ở câu 3
ĐS: PP=4,75 năm PV()= 1947.52; PV()= 1519.12
NPV= 428,40 B/C= 1,28
