- Debt repayment break-even point: Debt repayment break-even point indicates that from this point onwards the business must have money to repay the loan:
Tie
Total
fixed cost
Depreciation
–
basic period
Average loan principal
–
long term for each period
Tax
–
income
debt service =
Total revenue – Total variable costs
The lower the break-even point, the higher the feasibility of the project and vice versa. The break-even point only shows the relationship between the expected consumption volume and the profit required to be achieved for the product expected to be consumed at a certain price. Meanwhile, due to the competitive situation and the relationship between supply and demand in the market, the product can be sold at different prices at different periods, leading to different revenue and break-even points. Therefore, it is necessary to assume different selling prices to calculate the break-even points corresponding to those different selling prices.
For example: During the period, the enterprise plans to produce and sell 20,000 product A with a selling price of 6,000 VND/product. However, the enterprise cannot sell all the goods so it has to lower the selling price to 5,000 VND/product. Total fixed costs during the period are 30,000,000. Total variable costs are 60,000,000.
We calculate the following indicators:
Target
Unit | Selling price (6,000 VND/product) | Selling price (5,000 VND/product) | ||||||
Total revenue Variable cost per unit of product Break-even output | 1,000 VND 1,000 VND product | 20,000 x 6 = 120,000 | 20,000 x 5 = 100,000 | |||||
60,000 | = | 3 | 60,000 | = 3 | ||||
20,000 | 20,000 | |||||||
30,000 | = | 10,000 | 30,000 | = 15,000 | ||||
6,000 – 3,000 | 5,000 – 3,000 | |||||||
30,000 | = | 30,000 | = 75,000 | |||||
Revenue break even Total profit | 1,000 VND 1,000 VND | 1 – | 60,000 | 60,000 | 1 – | 60,000 | ||
120,000 | 100,000 | |||||||
(20,000 –10,000) x (6,000 – 3,000) = 30,000 | (20,000 –15,000) x (5,000 – 3,000) = 10,000 | |||||||
Maybe you are interested!
-
Commercial Bank Overview Report - 14 -
Overview of Saigon Thuong Tin Commercial Joint Stock Bank - Ha Tinh Branch -
Overview of the History of Formation and Development of Vietnam Joint Stock Commercial Bank for Foreign Trade -
Overview of Joint Stock Commercial Bank for Investment and Development of Vietnam -
Theoretical Overview of Factors Affecting Commercial Bank Liquidity
In the above example, if the selling price is 6,000 VND/product and the business only sells less than 10,000 products, it will suffer a loss. The break-even point is 60,000 and starting from the next revenue, the business will make a profit. If the selling price is 5,000 VND/product, to make a profit, the business must sell more than 15,000 products. The break-even point is shown in the following graph:
Profit zone
Revenue
variable costs
Break-even point with selling price of 5,000 VND/product
Break-even point with selling price of 6,000 VND/product
Fixed cost
Hole area
Value 100,000 VND
90
80
70
60
50
40
30
20
10
0
5 10
15 20
25 Products (1000 items)
@.2- Financial analysis method using net present value and internal rate of return: (Net present value: NPV; Internal Rate of Return: IRR)
Financial analysis using net present value (NPV) is a method of assessing the feasibility of an investment project based on the criteria of compound interest and compound value, net present value (NPV); internal rate of return (IRR).
* Time value of money: Money has its time value. The time value of money is the value of a certain amount of money at different times in a certain period of time. The time value of money comes from the surplus product that workers create for society. It is the added value when money becomes capital put into the reproduction process and created by human labor.
People often use money from previous income to reinvest or deposit in the bank to earn profit again. Therefore, its ability to earn profit is greater than previous income. This opportunity and ability to earn profit is the factor that determines the time value of money.
* Compound interest and compound value:
Compound interest is interest that builds up over the years; the interest from the previous year is added to the principal to calculate the interest for the following year. The amount received at the end of each year, including the principal and all interest determined by the compound interest calculation method, is called the compound value.
100 VND today, after 1 year it must be greater than 100 VND . 100 VND next year is only equivalent to something worth less than 100 VND today. So how much VND is 100 VND today equivalent to in the future? This depends on the interest rate and the length of time. Suppose the long-term savings interest rate is 10%/year, the length of time is 1-5 years. Then the annual equivalent amount in those 5 years of 100 VND will be as follows:
Length
time
Amount of money initial | Compound Interest Index (divisor) | Par value (compound value or future value of money) | |
one year 2 years 3 years 4 years 5 years | 100 100 100 100 100 | (1 + 10%) (1 + 10%) 2 (1 + 10%) 3 (1 + 10%) 4 (1 + 10%) 5 | 110 121 133 146 161 |
=> Formula for calculating the equivalent amount of money at different times: T n = V (1 + r) n
T n = Par value or compound value, or future value of money in year
nth (future Value : FV).
V: Initial investment or present value r: Interest rate of 1 year; n: Number of years of investment.
(1+r) can be called the compound interest index (divisor) or the result index that the present amount of money can only be equal to the future value calculated according to a certain compound interest index. People have calculated the compound interest table for use.
Appraising investment projects through evaluating compound interest and compound value indicators is meaningful: The capital invested must always generate profits and the source of profits and capital over the years of investment must be greater than the compound value over the years. Compound interest and compound value are the minimum efficiency evaluation milestones that investors must achieve when investing capital . In the above example, if an investor is looking for an investment opportunity in a project, that project must have a profit higher than 10% for him to invest capital, otherwise he will invest his savings more safely and leisurely.
* Net present value: (Net present value : NPV)
To calculate the net present value, we must first calculate the present value (PV).
Present value (present price) is the reverse of compound value, which is the value of money received at a point in the future converted to its present value.
PV n =
T n
(1 + r) n
= T n (1 + r) –n
PV n : is the present value of the investment income after n years n: number of years of investment
T n : is the compound value at the end of year n.
r : 1 year interest rate (discount rate)
From the above formula, people calculate and put into the table the current price of a currency according to different discount rates and different times.
The discount rate used to determine PV depends on medium and long-term lending rates and the inflation rate.
- Net present value (NPV):
Net present value (NPV) is calculated as the difference between the total present value over the years and the total investment capital of the project.
NPV = PV – V
NPV : net present value
PV: total present value of net income (income after deducting expenses and taxes)
V: total investment capital of the project (if the investment capital is implemented over many years, the value of the investment capital must also be converted to the base year for calculation).
* Internal rate of return: IRR
- Concept: (IRR) is the rate we must find so that with that interest rate, the total present value of future income from the investment (PV) is equal to the present value of the investment capital (V).
Or: IRR is the discount rate for which NPV (NPV = 0)
This means that if this discount rate is applied, the present value of total costs and total revenues are equal.
Practical significance: People use IRR to evaluate and make investment decisions. IRR is the maximum interest rate that the project can bear to ensure recovery of investment capital.
. IRR calculation method:
C1: Solve the equation to find r: for NPV = O
T 2 | T . . . | T n | = V | |||
(1 + r) | + | (1 + r) 2 | + | (1 + r) . . . | + | (1 + r) n |
T 1
C2: Use the interpolation method to calculate IRR through 3 steps (commonly used)
Step 1: We choose an arbitrary discount rate to calculate NPV. If NPV is positive, then take a larger discount rate to get a smaller NPV. Increase the rate until NPV is close to
0. Let's call that interest rate R 1 and we have NPV 1 .
Step 2: Continue to increase the interest rate until NPV is negative. If the negative number is larger, reduce the interest rate so that NPV is close to 0, call that interest rate R 2 and we have NPV 2 .
Note: For NPV to be accurate, the difference between R 1 and R 2 should not exceed 5%.
Step 3: We calculate IRR according to the formula.
NPV 1 | × (R 2 – R 1 ) |
NPV 1 + NPV 2 |
IRR is the maximum rate that a project can withstand to ensure recovery of investment capital . The discount rate of each industry will be different. But usually people base their choice on the medium and long-term lending interest rate and the inflation rate. The project selected for loan must have IRR the bank lending interest rate. If IRR < bank lending interest rate, there will be a loss, so it is better to deposit money in the bank than to invest capital.
For example: Calculate NPV and IRR, we have a 5-year investment project with the following data: Investment present value table:
Year
Investment amount (V) | If you choose a 7% discount rate | If you choose a 10% discount rate | |||
Index | Present value of investment (PV) | Index | Present value of investment (PV) | ||
0 1 2 3 4 5 | 1,000 250 20 10 10 40 | 1,0000 0.9346 0.8734 0.8163 0.7629 0.7130 | 1,000.00 233.65 17.47 8.16 7.63 28.52 | 1,0000 0.9091 0.8264 0.7513 0.6830 0.6209 | 1,000.00 227.28 16.53 7.51 6.83 24.84 |
Damage g | 1,330 | 1,295.43 | 1,282.98 | ||
Present value income statement:
Year | Customer number net income | If you choose a 7% discount rate | If you choose a 10% discount rate | ||
Index | Present value of income (NV) | Index | Present value of income (NV) | ||
0 1 2 3 4 5 | 120 300 500 500 250 | 1,0000 0.9346 0.8734 0.8163 0.7629 0.7130 | 112.15 262.02 408.15 381.45 178.25 | 1,0000 0.9091 0.8264 0.7513 0.6830 0.6209 | 109.09 247.92 375.65 341.50 155.23 |
Damage g | 1,670 | 1,342.02 | 1,229.39 | ||
Through the two tables above we see:
- Without calculating the present value of investment and income, the investment project after 5 years will have a profit of: 1,670 - 1,330 = 340 million.
- If calculating the present value, the result is:
. Choose a discount rate of 7% then NPV 1 = 1,342.02 – 1,295.43 = 46.59 million The company makes a profit
. Choose a discount rate of 10% then NPV 2 = 1,229.39 –1,282.98 = -53.59 million The company loses money. IRR calculation table:
NPV 1 | × (R 2 – R 1 ) |
NPV 1 + NPV 2 |
46.59 | × (10%– 7%) |
= 7% + | 46.59 + 53.59 |
IRR = 0.07 + 0.465 x 0.003 = 0.0839 0.084
IRR = 0.084 = 8.4%
If the medium and long-term loan interest rate in foreign currency is 7%/year. The above project has an IRR = 8.4% higher than the medium and long-term loan interest rate Investment is possible.
b.9. Assessment of loan safety conditions:
@- Collateral:
Fixed assets of an enterprise consist of 2 parts: physical part (tangible fixed assets) and non-physical part (intangible fixed assets). In reality, we have encountered projects where the non-physical part accounts for up to 45% of the total value of the equipment import contract. Because the non-physical part will not be collected when the asset is auctioned, the bank only accepts the value of the physical part as the loan security value.
- Physical part: includes total purchase value of equipment, price of spare parts to be replaced or purchased additionally for backup... value of physical assets calculated at import price.
- Intangible parts such as training costs, technology transfer, commission costs, interest, expert costs, survey costs... are not considered as loan security value because when auctioned, the intangible parts cannot be sold.
- Therefore, the value of imported equipment assets using bank loans will be less than the loan amount because the intangible part is not included. In case the total value of imported equipment assets does not include intangible costs, the value of imported equipment is equal to the loan amount. To ensure the principle that the value of the mortgaged assets must be at least 30% greater than the loan amount (depending on the nature and risk of the project, the ratio of the value of the mortgaged assets may have to be higher than the general regulation, may require 50, to ensure that the principal and interest can be recovered when auctioned). The borrower must commit to using other assets as additional collateral to the bank, such as committing to use the entire value of the new investment project including all offices, factories, warehouses, construction works, machinery and equipment, the value of the right to use, or the land rental value of the project... to mortgage to the bank.
In reality, there have been cases where new investment projects (such as factories, warehouses, other architectural structures, etc.) have not yet been formed or are under construction, so the determination of assets must be based on technical economic arguments or technical economic reports and total project estimates that have been approved by the competent authority in accordance with regulations.
In case the total value of the new investment project still does not ensure the loan safety ratio, the borrower must have other assets attached to mortgage to the bank. In all cases, the total value of the mortgaged assets must be greater than the current loan amount.
@- On legal basis:
- There must be a written commitment to mortgage the enterprise's assets, including assets that have been, are being, and will be invested in construction in the project (listing and determining the value of mortgaged assets) in accordance with the technical economic arguments (or feasibility study reports) approved by competent authorities, including the part of the project built with own capital and loan capital with approval (or
(in a separate written document) of the competent authority at the Ministerial level or the Provincial People's Committee Chairman level, and at the same time has the approval of the financial authority such as the Ministry of Finance (for central enterprises) or the Director of the Department of Finance (for local enterprises).
- Necessary documents proving legal ownership of mortgaged assets such as land allocation certificate, construction permit, decision approving technical economic thesis, design drawings, decision on asset allocation by the competent authority.
@- Construction insurance:
The investor can buy insurance at a premium rate and will be compensated accordingly in case of possible risks. This insurance will be a condition contributing to the safety of the loan. Credit officers need to consider the value of the construction insurance to contribute to the calculation of the mortgaged assets and from there have opinions on the credit limit for the borrower.
b.10. Assessment of socio-economic indicators:
* Determine the increase in revenue for the budget:
Including taxes and other sources increased by investment capital. Calculate the additional contribution to the budget per capital unit according to the formula:
(Comparison before and after the project) |
Total investment |
* Ability to create jobs for workers:
- Number of jobs created by the project.
- Compare investment capital per worker.
(The smaller the ratio, the better) |
Number of employees employed |
* Labor productivity:
Value added | (The higher the index, the better) |
Number of social workers |
* Ability to increase revenue and save foreign currency:
- The foreign currency savings level is equal to the difference (difference) between the foreign currency expenditure requirement if the item must be imported (calculated at CIF price) and the project's foreign currency import demand (import of machinery, equipment, raw materials) for production.