The appraisal report includes:
- Business performance report (profit and loss report)
- Estimated sources, annual debt repayment capacity and repayment period.
Customers' debt repayment sources are basically mobilized from three main sources: Retained profit after tax (usually 50-70% of total profit after tax); basic depreciation; other legal sources outside the project.
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To evaluate the financial efficiency of investment projects in theory and practice, people often have to use the following methods (or indicators):
* Net Present Value (NPV)
The net present value of an investment project is the difference between the present value of future net income streams and the present value of the investment capital.
Calculation formula:
NPV = CO + PV
In there:
NPV is net present value
C o is the initial investment capital in the project, C o has a negative sign (because it is an investment)
PV is the present value of the expected cash flows that a project will generate over its useful life. PV is calculated:
PV =πΆ 1+πΆ 2+πΆ 3+πΆ π‘
(1+π) (1+π) 2 (1+π) 3 (1+π) π‘
In there:
C t is the expected cash flows the project will bring in years t is the appropriate discount rate of the project
The meaning of NPV is to measure the expected added value that the project brings to the investor with the specific risk level of the project... It is difficult to verify the exact discount rate of each investment project. People can take it as equal to the input and output interest rates on the market... But usually it is the average cost of capital. Depending on each case, people also consider the interest rate fluctuations on the market, and the limited capital capacity of the investor when implementing the project...
Use NPV index to evaluate investment projects according to the following principles:
If the investment projects depend on the scale of capital sources, projects with NPVβ₯0 are selected (The reason why the project NPV=0 can still be selected is because then it means that the consumption streams of the project are just enough to recover the investment capital and provide a required interest rate for that capital). On the contrary, NPV<0 ο reject the project.
If projects are mutually exclusive, the project with the largest NPV β₯ 0 is selected.
* Internal Rate of Return (IRR)
Internal rate of return measures the rate of return on investment of a project. In terms of calculation techniques, the IRR of an investment project is the discount rate at which NPV=0, that is, the current net income is exactly equal to the present value of the investment capital. For an investment project with a period of T years, we have the formula:
NPV = π 0 +πΆ 1+πΆ 2+πΆ π
(1+πΌπ π ) (1+πΌπ π ) 2 (1+πΌπ π ) π
Meaning of IRR index:The IRR for a project is the required rate of return for the project. The IRR is considered to be the highest interest rate that an investor can accept without losing money if the entire investment in the project is borrowed capital (both principal and accrued interest) paid out of the project's cash flows as they arise.
People use two ways:
Direct calculation: First choose any discount rate, calculate NPV. If NPV>0, continue to increase the discount rate and vice versa. Repeat the above process until NPV=0 or close to 0, then this interest rate is equal to the IRR of the investment project.
Linear interpolation method: commonly used. First, choose 2 discount rates such that: With r 1 ο has NPV 1 > 0
With r 2 ο has NPV 2 < 0
Apply the formula:
1
IRR = π + πππ 1 (π 1 β π 2 )
πππ 1 β πππ 2
The difference between r 1 and r 2 must not exceed 0.05 for the IRR interpolation to be relatively correct.
Use IRR to evaluate and select the following projects :
First choose a discount rate as the IRR ( normally the standard IRR is the opportunity cost).
Compare if IRR β₯ IRR DM then the project is financially feasible, that is: if the investment projects are independent depending on the scale of capital sources, projects with IRR β₯ IRR DM are accepted.
If investment projects are mutually exclusive: choose the project with IRR β₯ 0 and the largest.
* Payback Period: (PP: Payback Period)
The payback period of a project is the length of time it takes to recover the initial investment.
head.
There are two ways to calculate this ratio: undiscounted payback period (not including
to the time value of money) and discounted payback period (discounting all present costs and benefits at the chosen discount rate).
The formula is similar:
Payback period =
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π‘ππππ ππ
The calculation can be done on the basis of the table:
The payback period formula provides important information about how long a company's capital is tied up in each project. Typically, managers can set a maximum payback period and will reject investment projects with longer payback periods.
Use the payback period criterion to evaluate and select investment projects according to the principle: The project with the smallest payback period is better, choose the project with the smallest payback period among mutually exclusive projects.
* Benefit-Cost Ratio (BCR) method
Reflects the project's profitability per unit of invested capital (converted to the present time).
β π
π΅ π
BCR =
π=0 (1+π) π
β π
πΆ π
π=0 (1+π) π
B i : Expected cash flow year i
C i : Cost of year i
Evaluation principle: if a project has BCR ο³ 1. It is therefore accepted (financially feasible).
BCR is a standard index to rank projects according to the principle of giving higher position to the project with higher BCR. .
1.2.7. Investment project appraisal method of commercial banks
To ensure the scientific and comprehensive nature of investment project appraisal. Appraisers often use a combination and flexibility of different appraisal methods. The basic methods in investment project appraisal include:
1.2.7.1. Sequential appraisal method
Project appraisal is conducted in order from general to detailed, taking the previous conclusion as the premise for the following conclusion.
General appraisal is a general review of the contents that need to be appraised of the project. Thereby, it is generally assessed whether the project is suitable for the socio-economic development strategy of the country, of the region where the project will be implemented and operated, and whether the project will bring any benefits to the community. Projects often have large investment capital, long investment time and complex technical nature, so appraisal is conducted to review the entire project in general to make general assessments of the project such as the legality and completeness of the documents, the reputation of the project developer, the activities of the customer and the suitability of the project with development plans... From there, the appraisal officer initially has a general assessment of the scale and necessity of the project.
Detailed appraisal: is conducted after the general appraisal. This appraisal is carried out meticulously, in detail, and specifically by credit officers for each project content, from appraising the project's legal conditions to appraising the market, technology, management organization, finance, and socio-economics of the project. Consider how much revenue and expected costs are in the investment, whether the project will be highly effective when put into operation, whether the ecological environment of the area where the project is invested will be greatly affected, and how is the implementation progress. From the detailed appraisal step, credit officers can draw conclusions.
conclude whether to continue investing in the project or not. If the basic content of the project does not meet the requirements, reject the project without going into further evaluation of the remaining content.
1.2.7.2. Method of comparative analysis of indicators
This method is used by Sacombank staff when assessing most of the project content. The content of this method is to compare the project content with the prescribed legal standards, technical standards appropriate to international and domestic practices, and practical experiences. The criteria given for comparison are as follows:
In assessing the technical aspects of the project, the credit officer considers comparing and contrasting with:
- Design and construction standards, standards on construction levels prescribed by the state or financial conditions that the project can accept.
- Standards on equipment technology in national and international strategic technology investment relations.
- Corporate financial ratios are consistent with current State and industry guidelines for each type of enterprise.
When assessing the market aspect of the project, the appraiser considers and compares with:
- Standards for project products that the market demands.
In assessing the financial aspect, CBTΔ considers comparing with:
- General indicators such as investment capital structure, investment rate
- Norms on production, energy consumption, raw materials, fuel, wages, management costs, etc. of the industry according to official economic and technical norms or planned and actual targets.
- Experience gained during the appraisal of similar projects can be used to compare and check the reasonableness and practicality of selected solutions.
- Investment efficiency indicators.
Analyze and compare to choose optimal options such as construction location, technology, equipment, technical solutions and construction organization.
1.2.7.3. Sensitivity analysis method
Sensitivity analysis is often used to determine the financial stability of a project, that is, to see how sensitive the project is to fluctuations in related factors. This method will show which factors will affect the project's effectiveness the most. From there, management methods can be proposed during implementation. To implement this method, it is necessary to first identify the factors that can greatly affect the financial efficiency of the project, then predict some unforeseen situations to easily assess the impact of those fluctuations on the project's effectiveness. Through sensitivity analysis, the Bank will know how risky the project is, thereby determining the interest rate for its capital supply, because a project with a high level of risk will also correspond to a high interest rate.
1.2.7.4. Forecasting method
The content of this method is to use statistical survey data and apply statistical extrapolation forecasting methods to check the supply and demand of project products, product prices, equipment, raw materials and other inputs that directly affect the feasibility of the project.
This method is often applied by credit officers to assess the market aspect of the project. However, the appraisal officers only use the results of investigations by departments and consult experts. In fact, forecasting is a common weakness of Vietnam, the statistics are incomplete and inaccurate, leading to incomplete statistical forecasts, especially forecasting the market demand of construction projects. Therefore, the application is still limited.
Investment projects are often long-term projects, so the method of accurately forecasting the feasibility of the project is very important and directly related to whether the investment capital in the project will be effective or not.
1.2.7.5. Risk Elimination Method
Investment projects with large investment capital, long construction and operation time, and directly affected by many objective factors may encounter many risks such as: policy mechanism risks; construction and completion risks; input factor supply risks; macroeconomic risks; interest rate risks; management risks, etc.
To ensure the stability of the project's effectiveness, it is necessary to predict some possible risks in order to have appropriate economic or administrative measures, minimize the risk impacts or spread the risks to the partners related to the project. The appraisal officer carefully examines the project's commitment contracts to be able to make risk forecasts, thereby providing the most effective measures to minimize the risks in the project.
1.2.7.6. Method of obtaining expert opinions
Due to the characteristics of investment projects with complex technical content, during the appraisal process, the appraisal staff collected opinions from experts in the fields related to the project. By using this method, the appraisal staff took advantage of the in-depth knowledge and experience of experts on issues of concern, but the credit officers themselves did not have enough information and capacity to make accurate and complete assessments. During the application process at Sacombank Ha Tinh Branch, this method showed some limitations in the selection of experts, because the selected expert must be a competent, reputable expert and have an objective view when conducting project appraisal, which is not a simple matter.
1.2.8. Quality of investment project appraisal
1.2.8.1. Concept of investment project appraisal quality
The quality of investment project appraisal is the best response to the requirements of the appraisal agency in investment activities: in accordance with the provisions of law and the socio-economic development strategy of the locality, the industry, and the country, ensuring both benefits for the investor and benefits for society. In the process of investment project appraisal, credit officers must objectively consider and evaluate all issues of an investment project. The quality of investment project appraisal
Investment appraisal is reflected in the level of accuracy, honesty and flexibility in evaluating investment projects. Good quality investment project appraisal will ensure that investment decisions of investors and competent authorities are reasonable and feasible, contributing to the development of the country.
1.2.8.2. Main factors affecting investment project appraisal activities of commercial banks
1) Subjective factors
Appraisal quality is influenced by many factors, which can basically be divided into subjective and objective factors. Subjective factors are internal factors that the Bank can proactively control and adjust.
* Human factor
Humans are considered the driving force of social development in the sense that they are both the subject and the object that social activities aim at. The human factor is always one of the important factors in all work. In appraisal activities, it is humans who build the process with certain criteria, methods, and sequences, playing a dominant role, deciding on other factors and linking factors together. However, here, we only focus on the human factor from the perspective of the subject directly organizing and implementing investment project appraisal.
The results of project financial appraisal are the results of financial analysis and assessment of the project based on the subjective assessment of the appraiser, but must be based on scientific basis, modern equipment, etc., which will be meaningless if the appraiser does not try to use them effectively.
People play an important role in improving the quality of appraisal and that depends on the aspects: knowledge, experience, capacity and ethical qualities of the appraiser. Knowledge here is not only understanding of pure professional expertise but also includes understanding of science, economics and society. Experience is what is accumulated through practical activities, capacity and ability to grasp and handle work on the basis of accumulated knowledge. Thus, the level of CBTΔ directly affects the quality of appraisal, moreover it is very important because financial appraisal