Question

Enterprise A is considering a new production line project with 100% equity financing. The expected operational life of the project is 6 years. Investment value in equipment is 1,500 million VND, which is paid once in 0. Working capital is spent 2 times in the first 2 years of the project (year 0 and year 1), with the amount respectively 300 million VND and 100 million VND. Working capital is fully recovered once at the end of the project (year 6). The production line is depreciated evenly over 6 years, with negligible liquidation value.

Year

1

2

3

4

5

6

Revenue

860

920

1.050

1.200

880

820

Million VND
Variable costs are 40% of net sales. Fixed costs (excluding depreciation of fixed assets) are VND 250 million/year. The corporate income tax rate is 20%. Corporate discount rate is 15%/year. Determine the NPV of the project. If the project is selected according to NPV criteria, will the project be approved?

Answer 1

To calculate the NPV of the project, we need to find the cash inflows and outflows for each year and discount them back to their present value using the corporate discount rate of 15%.

Year 0:

Initial investment = 1,500 million VND

Working capital = -300 million VND

Year 1:

Revenue = 860 million VND

Variable costs = -344 million VND (40% of net sales)

Fixed costs = -250 million VND

Depreciation = -250 million VND (1,500 million VND / 6)

Operating income before taxes = 16 million VND (860 - 344 - 250 - 250)

Taxes = -3.2 million VND (20% of operating income before taxes)

Operating income after taxes = 12.8 million VND (16 - 3.2)

Add back depreciation = 250 million VND

Net cash flow = 262.8 million VND

Discounted cash flow = 228 million VND (262.8 / 1.15)

Year 2:

Revenue = 920 million VND

Variable costs = -368 million VND (40% of net sales)

Fixed costs = -250 million VND

Depreciation = -250 million VND (1,500 million VND / 6)

Operating income before taxes = 52 million VND (920 - 368 - 250 - 250)

Taxes = -10.4 million VND (20% of operating income before taxes)

Operating income after taxes = 41.6 million VND (52 - 10.4)

Add back depreciation = 250 million VND

Net cash flow = 291.6 million VND

Discounted cash flow = 231.9 million VND (291.6 / 1.15^2)

Year 3:

Revenue = 1,050 million VND

Variable costs = -420 million VND (40% of net sales)

Fixed costs = -250 million VND

Depreciation = -250 million VND (1,500 million VND / 6)

Operating income before taxes = 130 million VND (1,050 - 420 - 250 - 250)

Taxes = -26 million VND (20% of operating income before taxes)

Operating income after taxes = 104 million VND (130 - 26)

Add back depreciation = 250 million VND

Net cash flow = 354 million VND

Discounted cash flow = 255.3 million VND (354 / 1.15^3)

Year 4:

Revenue = 1,200 million VND

Variable costs = -480 million VND (40% of net sales)

Fixed costs = -250 million VND

Depreciation = -250 million VND (1,500 million VND / 6)

Operating income before taxes = 220 million VND (1,200 - 480 - 250 - 250)

Taxes = -44 million VND (20% of operating income before taxes)

Operating income after taxes = 176 million VND (220 - 44)

Add back depreciation = 250 million VND

Net cash flow = 426 million VND

Discounted cash flow = 286.6 million VND (426 / 1.15^4)

Year 5:

Revenue = 880 million VND

Variable costs = -352 million VND (40% of net sales)

Fixed costs = -250 million VND

Depreciation = -250 million VND (1,500 million VND / 6)

Operating income before taxes = 28 million VND