Analysis

projected

Inverse^
 INDEX P.

0. Executive Summary........................................................................................................................................5
Project features................................................................................................................................................5
0.1. Main characteristics of the project...........................................................................................................5
0.1.1. Type of project and needs it covers...................................................................................................5
0.1.2. Investment to be made and financing of the project..........................................................................6
Funds Applications......................................................................................................................................6
Analysis Performed.........................................................................................................................................7
0.2. Type of analysis performed......................................................................................................................7
0.2.1. Tools to check economic viability.....................................................................................................8
0.2.2. Tools to check financial viability......................................................................................................8
Conclusions...................................................................................................................................................10
0.3. Conclusions............................................................................................................................................10
0.3.1. Base Scenario Analysis...................................................................................................................10
0.3.2. Base scenario sensitivity analysis....................................................................................................11
Sensitivity Economic Viability..................................................................................................................11
Sensitivity Financial Viability...................................................................................................................11
Project Description and Characteristics........................................................................................................14
1. Project description.....................................................................................................................................14
1 .0. Project description............................................................................................................................14
1.1. Investment to be made.......................................................................................................................14
1.1.1. Investment in Fixed or Non-Current Assets...............................................................................14
1.1.2. Investment in current assets or working capital..........................................................................16
1.2. Project financing....................................................................................................................................17
Feasibility Analysis.......................................................................................................................................20
2. Economic-Financial Viability Analysis of the project.................................................................................20
Concept Viability..........................................................................................................................................20
2.0. Concept of feasibility and analysis tools................................................................................................20
2.0.1. Concept of economic-financial viability.........................................................................................20
2.0.2. Tools to check economic viability...................................................................................................21

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 2.0.3. Tools to check financial viability....................................................................................................25
2.1. Preparation of the base scenario.........................................................................................................27
2.1.1. Base scenario concept.................................................................................................................27
2.1.2. Elements necessary for its preparation.......................................................................................27
2.1.3. Base Scenario Analysis...............................................................................................................29
Conclusions Financial Viability................................................................................................................31
2.2. Sensitivity analysis.............................................................................................................................32
2.2.1. Economic sensitivity (Profitability)............................................................................................33
NPV Sensitivity.........................................................................................................................................33
2.2.2. Financial sensitivity (solvency)..................................................................................................35
Sensitivity Circulating Capital Need.........................................................................................................35
3. Annex I: Methodology and Hypotheses.......................................................................................................38
3.0. Method and hypotheses used in the flows..............................................................................................38
3.0.1. Direct method for constructing flows..............................................................................................38
2. Investment Cash Flows......................................................................................................................40

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Page: 4
0. Executive Summary
Executive With the preparation of this report, the economic viability of the
investment project that the company intends to carry out will be shown.
Summary In this executive summary, we will mention the main conclusions reached
after carrying out the analysis of the economic-financial viability of the
future investment project.

Project features

0.1. Main characteristics of the project

The main characteristics of the project are:

0.1.1. Type of project and needs it covers

The current project aims to compete in the current market with more efficient tools,
seeking an improvement in the company's competitiveness.

The project under analysis consists of the construction of a warehouse that will serve as a
warehouse for raw materials used in the headquarters located in Madrid. The project also
contemplates the purchase of 3 commercial trucks necessary for the transportation of the
aforementioned raw materials.

The estimated income refers to the amount that the parent company is currently paying
for this type of service, which is currently outsourced.

Initially, it has been considered that the project will have a duration of 10 years, after
which it can either continue with exploitation or sell it for its residual value, which has been
estimated to amount to €500,000.

Page: 5
0.1.2. Investment to be made and financing of the project

In this section, we will only mention the estimated total amount of the investment
and its financing sources. Sending the reader to the next section of the report where the
total description of the investments necessary for the project is detailed. In the following
table, we show the applications and sources of funds:

Funds Application Sources of funds

Kind of Amount Type of Funds Amount %
Application

Investment €1,046,500.00 Own Funds 658.859,35 € 51,28 %

Immobilized

Investment VAT €188,370.00 External Funds 626.010,65 € 48,72 %

(loan -
commissions)
Investment
50.000,00 €
Working Capital

Total €1,284,870.00 Total Origins €1,284,870.00 100 %

Applications Of funds

Funds Applications

As can be seen in the previous table, in order to carry out this project, an
investment in fixed assets of €1,046,500.00 will be needed. To this amount we must add
€188,370.00 in VAT, an amount that has been assumed to be recovered in the second
year (2012) when requesting its refund.

To ensure the financial viability of the project, that is, that there is no gap between
collections and payments associated with it, it will be necessary to maintain a certain
amount of funds permanently immobilized. These funds are called circulating capital or
working capital in finance and for this project it has been estimated that they amount to
€50,000.00. It should be noted that although these funds have been subtracted from the
cash flows of the initial period, they have been added in the final period, considering that
when the investment project stops being exploited, they will be released again and can be
used for other purposes.

Page: 6
 Sources of Funds

As can be seen, the company will provide 51.28% of the funds necessary to carry
out the project. Specifically, it will contribute €658,859.35. You will also need to have
€626,010.65 of external funds (which are made up of €642,435.00 of the loan principal
less opening fees and other expenses).

To obtain these foreign funds, the company will request a loan with the following
characteristics.

Loan Features
Amount to request 642.435,00 €
Type of interest 5,00 %
Amortization years 10 years
Years of lack 2 years

-6.424,35 €
Estimated opening fee (1.00% of the principal)
Other expenses -10.000,00 €
Fee during grace years 2.676,81 €
Fee for remaining years 8.133,18 €

As can be seen in the previous table, the requested loan has a 2-year grace period,
in which only interest will be paid. In such a way that the fee during said period will
amount to €2,676.81. After these 2 years the fee will become €8,133.18.

Subsidies

A subsidy will be requested for the development of the project. It is estimated that
the amount will amount to €313,950.00. It has been considered that it will be collected in
2012, however, its accrual has been taken to the operating account (in the heading "9.
Imputation of subsidies") from the first year. The amount of said accrual is based on the
depreciation of the property that will be subsidized.

Note Origin To finish the section on origins and applications of funds, we can only
and comment that when carrying out the sensitivity analysis of the project
Applications to a possible increase in the initial investment budget, it has been
considered that the supposed increase must be financed 100% by own
of Funds
funds. Since the external funds (loans) were already requested based on the initial budget
and there is no guarantee that the financing would be expanded, in such a way that it will
be the project promoters themselves who will have to cover this increase in the budget. .

Analysis Performed

0.2. Type of analysis performed

The purpose of this report is to verify the economic-financial viability of this
investment project. To do this, we will start from a base scenario composed of initial cash
flows. To this scenario, a sensitivity analysis will be applied, which will be aimed at
verifying how possible changes in both the volume of expected income and an increase in

Page: 7
the initial investment budget would affect the results initially obtained.

First, we will define what is meant by economic viability and financial viability and
subsequently, we will see the tools used to measure it.

Definition of Economic Viability

A project will prove to be economically viable, provided that a positive and

acceptable profitability is obtained from it, that is, the project must achieve a greater
profitability than that which would be obtained if it were invested in a financial asset, with
a level of equivalent risk, existing in the market.

Definition of Financial Viability

A project will be viable from a financial point of view, as long as, at all times, it
demonstrates that it has sufficient resources to be able to meet the payment obligations
incurred during its development. This ability to meet payment obligations is what is called
Solvency in finance.

0.2.1. Tools to check economic viability

The investment selection criteria used in this report to verify economic viability will
be:

- Net Present Value (NPV) or Net Present Value (NPV): Net present value is a
measure of the amount of value that is created or added today in the company as a result
of having made an investment. The project will be accepted as long as the NPV is positive
or zero.

- Internal Rate of Return (IRR): The IRR or internal rate of return is the
discount rate that makes the present value of the project flows equal to the initial capital
invested (capital contributed by the promoters). That is, it is the discount rate that makes
the NPV 0.

- Accumulated Cash Balance at the end of the Project: It is calculated by

accumulating the cash balances from the initial to the last period of the project. Therefore,
if the cash balance for the last year is negative, the project will not be economically viable.

0.2.2. Tools to check financial viability

To check the financial viability of the project we will use the following tools:

- Financial Solvency Limit: Balance below which the accumulated treasury

balance of the project should never be found. In our case, the project will be financially
viable, as long as the accumulated balance of the project is greater than the financial
solvency limit. For all years, the accumulated balance of the period must be greater than
the financial solvency limit. If this is not met, there will be a certain need for working
capital.

- Need for Working Capital : There will be a need for working capital if, in any
projection period, the accumulated balance of the project is less than the financial
solvency limit. In this period, it would be necessary to have a greater volume of working

Page: 8
capital.

Page: 9
 Conclusions

0.3. Conclusions
After estimating the project's cash flows for the base scenario and performing a
sensitivity analysis to the decrease in sales and the increase in the initial investment budget.
The main conclusions reached are:

0.3.1. Base Scenario Analysis

In the following table, the data obtained in the economic and financial analysis for the
base scenario have been summarized.

Economic Analysis (profitability) Financial analysis

Indicator Worth Decision (solvency)

GO
(10.00% minimum Project The project will not have
738.245,28 € solvency problems.
profitability) acceptance.

31,85 % Project
IRR
acceptance.
IRR>Minimum
profitability.

Accumulated
Cash Flows at
the end of the Project
1.712.915,49 €
Project acceptance.

Conclusions
Economic analysis Financial analysis

Economically viable Financially viable.

Based on the results obtained, we can conclude that:

Conclusions Economic Viability

The project proves to be profitable, achieving a profitability of 31.85% (IRR),

higher than the minimum profitability required by the promoters, which amounts to 10.00%.
Furthermore, the accumulated cash flows at the end of the project will amount to
€1,712,915.49.

Page: 10
 Conclusions Financial Viability

The project will not have solvency problems. Since the investment budget in
working capital will not be exceeded at any time.

0.3.2. Base scenario sensitivity analysis

Sensitivity Economic Viability

Through this analysis, we will check the sensitivity of the project's profitability to the
negative variation in the sales budget, together with the possible increase in the investment
budget. To do this, we obtain pairs of values (Error % sales, Error % investment budget) limit
or border, which will make the project no longer profitable. We call this set of pairs of values
the Project Profitability Frontier.

This PROFITABILITY FRONTIER OF THE PROJECT is telling us how safe it is , since the
larger the pairs of values, the greater the safety margins with respect to variations in sales
and initial budget, the project can support without ceasing to be profitable. In the following
table we show the sensitivity of the NPV to the variation in the level of sales and the initial
investment budget.

Sensitivity Analysis: UAN Viability J. '. * -

^ Sales Decrease
0 5 10 15 20 25 30 35 40 45

gY T
0 738.245 € 61 9.998€ 501.751 € 383.504 6 265.2576 147.0106 28.7636 -89.484 6 -208.5566 •340.150 €
5 686 419 € 568.172 € 449 925 € 331.6786 213.4316 95.184 6 -23.0636 -141.311 6 ■260.5456 ■402.109 6
6
Sc 10 634 593 € 516.346 € 398.099 € 279.8526 161.6056 43.358 6 ■74.8906 -193.137 6 ■312.6096 ■456.069 6

EITH 15 582.767€ 464.520 € 346.273 € 228.0266 109.7796 ■8.469 6 -126.7166 -244.963 6 -364.691 6 -510.0296
ER 20 530.941 € 412.694 € 294.447 € 176.1996 57.9526 -60.295 6 178.5426 -296.7896 -416.7806 -563.9886
AND
5 25 479.115€ 360.868 € 242.620 € 124.3736 6.1266 -112.121 6 -230.3686 -348.6156 -468.9666 -617.9486

AND 30 427.289 € 309.041 € 190.7946 72.5476 -45.7006 -163.9476 -282.1946 -400.441 6 -521.1536 -671.9076
0)
35 375.462 € 257.215 € 138.9686 20.721 6 -97.5266 -215.7736 -334.0206 -452.2676 -573.3806 -725.8676
6
c 40 323.636 € 205.389 € 87.142€ ■31.1050 -149.3526 -267.5996 •385.8466 -504.1146 -625.681 6 -779.8276
\=O. 45 271.810 € 153.563 € 35.3166 -82.931 6 ■201.1786 ■319.4256 ■437.6726 ■555.971 6 ■677.981 6 -833.7866

As can be seen in the table, there are several pairs of values below which the project is
profitable. For example, we find the pair (30.00%, 0.00%), which implies that at a maximum
decrease in sales of 30.00%, the maximum increase that can occur in the investment budget
amounts to 0.00%, since a higher increase would make the project unprofitable.

Sensitivity Financial Viability

To check the sensitivity of the project in the financial aspect, we will see the
sensitivity of the need for working capital to variations in sales and the investment budget. So
if at any time the need for working capital was negative, this would indicate that the project
would show solvency problems. Below we show the table of working capital needs.

m Sensitivity Analysis: Financial Viability i in Sales

^^f^decrease AND
Page: 11
 either 5 10 15 20 25 30 35 40 45
D
AN
T
0 0 50.000 € 50.0000 50.0000 50.000 € 50.000 € 50.0000 50.0000 50.0000 50.0000 36.7140
l 5 50.0000 50.0000 50.0000 50.000 0 50.000 € 50.0000 50.0000 50.000 0 50.0000 36.7140
either
Sc 10 50.000 € 50.0000 50.0000 5o.ooo e 50.000 € 50.0000 50.0000 50.000 0 50.0000 36.7140

g 15 50.0000 50.0000 50.0000 50.000 0 50.000 € 50.0000 50.0000 50.000 € 50.0006 36.7140
• + 20 50.0000 50.0000 50.0000 50.000 0 50.000 € 50.0000 50.0000 50.000 0 50.0000 36.7140
n
0 25 50.0000 50.0000 50.0000 50,000 e 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
e-
AND 30 50.0000 50.0000 50.0000 5o.ooo e 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
9
35 50.0000 50.0000 50.0000 50.000 € 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
6
c 40 50.0000 50.0000 50.0000 50,000 e 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
45 50.0000 50.0000 50.0000 5o.ooo e 50.0000 50.0000 50.0000 50 000€ 50.0000 36.7140
-
-either

As can be seen in the table, the project, considering that the initial investment budget
is not increased, could support a decrease in sales of up to 45.00%.

If we consider that sales were as projected in the base scenario, the project could
support an increase in the investment budget of 45.00% without having solvency problems.

Page: 12
Page: 13
 Project Description and Characteristics

1. Project description

1 .0. Project description

The project under analysis consists of the construction of a warehouse that will
serve as a warehouse for raw materials used in the headquarters located in Madrid.
The project also contemplates the purchase of 3 commercial trucks necessary for the
transportation of the aforementioned raw materials.

The estimated income refers to the amount that the parent company is currently
paying for this type of service, which is currently outsourced.

Initially, it has been considered that the project will have a duration of 10 years,
after which it can either continue with exploitation or sell it for its residual value,
which has been estimated to amount to €500,000.

1.1. Investment to be made

When carrying out any investment project, two types of investments must be
made.

- Investment in Fixed or non-current Assets.

- Investment in Circulating Capital or Working Capital.

We see each of them:

1.1.1. Investment in Fixed or Non-Current Assets

Investment in fixed assets will be any investment aimed at the acquisition of

fixed or non-current assets (whether tangible or intangible) necessary for the start-
up and development of the project. Within this investment, the necessary expenses
until the start-up of said fixed assets will also be included.

Page: 14
 In the following table we will show the different investment items in fixed
assets, of which this project is made up.

Description of the % Total amount (in

Amount Unit Amount TOTAL VAT
Investment Asset VAT BI)
(in BI)

Industrial Warehouse of 1 1.000.000,00 € 18 % 1.000.000,00 € 180.000,00 €

10,000 m2
Office furniture 1 6.000,00 € 18 % 6.000,00 € 1.080,00 €

HP Pavillion Computer 1 1.000,00 € 18 % 1.000,00 € 180,00 €

Hp Laserject Red Printer 1 500,00 € 18 % 500,00 € 90,00 €

Renault Traficc Van 3 13.000,00 € 18 % 39.000,00 € 7.020,00 €

188.370,00
TOTAL PAYMENT INVESTMENT IN ASSETS 1.046.500,00 €
€

As can be seen, the total investment in fixed assets amounts to

€1,046,500.00, to which €188,370.00 in investment VAT must be added. This
amount must be taken into account when financing the project, since it must be paid
to the suppliers, but its return will subsequently be required to the tax agency,
which has been considered to be carried out in 2012.

Page: 15
1.1.2. Investment in current assets or working capital

In addition to the investment in fixed assets, a fixed investment in working capital

must be quantified in every investment project. This investment has the sole purpose of
ensuring the financial viability of the project, that is, being able to cover any gaps in cash
flows that may be generated.

From the point of view of calculating profitability, these funds will not have a great
impact, since although they are initially considered as an initial investment, this will be an
asset owned by the company, which will be recovered at the end of the period of
investment at which time they will be released to be used in other projects.

For the current project, it has been estimated that the necessary investment in
working capital will amount to €50,000.00.

Page: 16
1.2. Project financing

Every investment project needs to have the necessary financing to be carried out.
The following table shows the origin and application of project funds.

Funds Application Sources of funds

Kind of Amount Type of Funds Amount %
Application
Investment
€1,046,500.00 Own Funds 658.859,35 € 51,28 %
Immobilized

Investment VAT 626.010,65 € 48,72 %

€188,370.00 External Funds
(loan - commissions)
Investment
50.000,00 €
Working Capital

Total €1,284,870.00 Total Fund

1.284.870,00 € 100 %
Applications Sources

As can be seen, of the €1,284,870.00 initial investment, the company will

contribute 51.28% of the funds. Specifically, you will contribute €658,859.35. You will also
need to have €626,010.65 of external funds (which are made up of €642,435.00 of the
loan principal less opening fees and other expenses).

To obtain these foreign funds, the company will request a loan with the following
characteristics.

Loan Features
Amount to request 642.435,00 €
Type of interest 5,00 %
Amortization years 10 years
Years of lack 2 years
-6.424,35 €
Estimated opening fee (1.00% of the principal)
Other expenses -10.000,00 €
Fee during grace years 2.676,81 €
Fee for remaining years 8.133,18 €

We only want to point out that the amount on which profitability calculations must
be made (calculation of NPV and IRR) is on the amount actually contributed by the
promoters, that is, on €658,859.35 of own funds. Regarding the €626,010.65 of external
funds, the only thing that should concern us is to verify that the project will generate
enough resources to be able to return the amount obtained plus the interest generated.

Subsidies

A subsidy will be requested for the development of the project. It is estimated that

Page: 17
the amount will amount to €313,950.00. It has been considered that it will be collected in
2012, however, its accrual has been taken to the operating account (in the heading "9.
Allocation of subsidies") from the first year. The amount of said accrual is based on the
depreciation of the property that will be subsidized.

Page: 18
 Feasibility Analysis

2. Economic-Financial Viability Analysis of the

project
In this section, we will carry out the study of the economic and financial
viability of the project. To do this, we will first briefly explain what is meant by
economic-financial viability and what are the financial tools that we will use to
calculate it. Subsequently, we will show the base scenario, on which we will perform
a sensitivity analysis. This analysis will be aimed at verifying how sensitive the
project is to negative deviations (errors) in the volume of projected income. In such
a way that the greater the deviation that the project can endure without ceasing to
be viable, the more certainty we will have about the true viability of the project.

Concept Viability

2.0. Concept of feasibility and analysis tools

It is clear that before embarking on the implementation of any business project

and assuming the risk inherent in its development, it is essential to carry out an
analysis to verify its economic-financial viability, in such a way that the results
obtained will allow us to conclude if it is It is advisable to carry out said project, if
any modification has to be made or the idea should be abandoned.

2.0.1. Concept of economic-financial viability

The economic-financial viability of any project is marked by the following

definitions.

Definition of Economic Viability

A project will prove to be economically viable, as long as a positive and

acceptable profitability (greater than that obtained in the market) is obtained from
it.

Definition of Financial Viability.

A project will be viable from a financial point of view, as long as, at all times, it
demonstrates that it has sufficient resources to be able to meet the payment
obligations incurred during its development. This ability to meet payment obligations
is what is called Solvency in finance.

Page: 20
2.0.2. Tools to check economic viability

As mentioned in the previous point, a project will be viable from an economic

point of view, as long as it obtains a positive and acceptable return for the
investor/developer.

Now, in finance, profitability can be calculated in different ways and forms,

such as, for example, economic profitability, also known as ROI (Return On
Investment), which indicates the profitability obtained by the assets in which it has
been invested. or the financial profitability, known as ROE (Return On Equity), which
shows us the profitability of the funds contributed by the investor to the project;
These two returns (ROE and ROI) take as magnitude for the calculation of the result
obtained, some result of the operating account (either the BAII, BAI, BN). . Well,
currently, when analyzing the economic viability of a project, financial flows
(collections and payments) are taken into account more than economic flows
(income and expenses). This does not mean that the analysis to be carried out is
financial, since the collections and payments flows are mainly defined by the
economic flow of income and expenses. In such a way that in the long term, the
majority of income will be transformed into collections and expenses into payments,
which indicates that the analysis to be carried out continues to be eminently
economic. Furthermore, it is clear that any company that is not capable of obtaining
a positive economic flow (profit) will be doomed to have solvency problems and
even to its disappearance.

Among the tools most used today to check the economic viability of an
investment project are:

- Net Present Value or NPV.

- Internal Rate of Return or IRR.

- Accumulated cash balance of the Project.

Let's define each of them.

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 Net Present Value or NPV

It is the best known, best and most generally accepted project evaluation
method. It measures the profitability of the project in monetary values that exceeds
the profitability desired by the investor after recovering the entire initial investment.
That is, it measures the amount of value that is created or added today as a result of
making the investment.

To obtain the NPV, the current value of all expected cash flows is calculated and
the amount of the initial investment (funds contributed by the promoters to the
project) is subtracted from them. The formula for its calculation is:

n Net Cash Flow^ x (1 + Reflected Inflation'/ Net Present Value = -Initial Flow + 2---------*
------------------------------------------------------------------------♦----------------------------------- t=l (1 +
Ky x (1 + Inflation Economy) 1
Being:

Initial Flow: Initial balance of the project flows. It coincides with the amount
of own funds that will be contributed to the project by the promoters or
investors. Its balance is always negative, since it implies a cash outflow for
investors, who hope to recover them (with the project flows) and also obtain
capital gains.

Net cash flow: is the cash flow for year t.

K: performance or profitability demanded by the promoters of the funds

invested in the project. The higher the required performance, the lower the
value for the NPV. Normally, the yield is higher than the interest rate of a
risk-free asset with a maturity similar to the duration of the project. For
example, if the project has a duration of 2 to 5 years, the risk-free asset that
can set the minimum profitability (to which a risk premium will have to be
added) would be the 2, 3 or 5-year state bonds. . If the duration is longer,
we would talk about 10, 15 to 30 year obligations.

Inflation of the economy: General rise in prices in the economy.

Passed-on inflation: Price increases that we pass on to our income.

NPV decision criteria

The criteria that will mark the acceptance or not of the project are:

If NPV>0: The project is accepted. Since it proves to generate value at the

profitability demanded by investors (K).

If NPV<0: The project is rejected. Since it does not prove to generate value
at the profitability demanded by investors (K).

Finally, just comment that the NPV is very sensitive to the discount rate (required

Page: 22
profitability of the project) used, in such a way that the higher the discount rate, the
lower the value for the NPV. Ideally, this discount rate or required profitability should
adjust as far as possible to the expression:

K=Profitability of risk-free asset + risk premium

However, the determination of the risk premium is completely arbitrary, which

means that the required profitability is also arbitrary. This could mean that a project is
rejected, which although it will not have the profitability required by the promoters
(K), it will have an acceptable profitability, if we compare it with other investment
assets. Well, to know what the exact profitability of our project is, the IRR will be used.

Internal Rate of Return (IRR)

The IRR or internal rate of return is the discount rate that makes the present
value of the project flows equal to the initial capital invested (capital contributed by
the promoters). That is, it is the discount rate that makes the NPV 0.

From what has been said above, it follows that the IRR of the project is indicating
its internal profitability.

The calculation of the IRR is carried out iteratively, applying different values to
the discount rate to the NPV formula and looking at the NPV value, the process ends
when the NPV value is 0.

IRR decision criteria

The criteria that will mark the acceptance or not of the project are:

If the IRR > K: The project is accepted. Since the internal profitability of the
project is greater than the profitability demanded by the
promoters/investors. This ensures that the NPV is positive.

If the IRR < K: The project is rejected. Since the internal profitability of the
project is lower than the profitability demanded by the promoters/investors.
This makes the NPV negative.

As can be seen, the IRR decision criteria depend on the value of the profitability
demanded by the promoters (K). As mentioned in the NPV point, the required
profitability may be too high and therefore the project will be rejected. Through the
use of the IRR we can observe the profitability obtained with the project, in such a way
that although the IRR is lower than the profitability required by the promoters (K), if
this is positive and higher than the profitability of a free asset of risk, the project could
be considered acceptable by considering that the required profitability (K) was too
high, so that if we accept the IRR as return on capital, we must accept the project.

Accumulated Cash Balance at the end of the Project

It is calculated by accumulating the cash balances from the initial to the last
period of the project.

Page: 23
 Decision Criteria Project Cash Balance

It will be especially useful if, in the projected flows, there are periods with
negative cash balances (unconventional cash flows), since this could cause the NPV
and IRR to fail.

This assessment method is not used to accept the project, but rather to reject
it. That is, it serves as a method of controlling NPV and IRR, since although
infrequently, these methods can accept projects that are not economically viable.

The criteria are:

- If there are negative cash flows in the life of the project and the NPV and IRR
accept it:

- If the accumulated balance is positive and large, the project will be

accepted.

- If the balance is negative or not very high in relation to the initial

contribution of the promoters, the project will be rejected.

- If there are negative cash flows in the life of the project and the NPV and IRR
reject it, the project is rejected.

Page: 24
2.0.3. Tools to check financial viability

As mentioned above, a project will be viable from a financial point of view, as

long as, at all times, it demonstrates that it has sufficient resources to be able to
meet the payment obligations incurred during its development.

To check the financial viability of the project we will use the Financial Solvency
Limit and the need for working capital as a tool.

Financial Solvency Limit

In our case, the project will be financially viable, as long as the accumulated
balance of the project is greater than the financial solvency limit. Which is calculated
according to the following formula:

Financial Solvency Limit = Initial Partner Contribution - Working Capital Investment

Ex. If the contribution of the partners, that is, the initial accumulated balance
of a project is – 100,000 (um) and in the project it has been estimated that the
initial investment in working capital is 50,000 (um). The solvency indicator would
be:

Financial solvency limit: - 100,000 - 50,000 .= - 150,000

Decision criteria

For all years, it must be met that:

Accumulated balance of the period > Financial solvency limit

That is, as long as the annual accumulated balances are higher than the
financial solvency limit, it will be ensured that the project is financially viable, or in
other words, there will be enough cash in hand to ensure all payments. On the
contrary, if during any period the accumulated balance was less than the limit, this
would imply that up to that moment, the payments of the project have exceeded the
collections by an amount greater than the working capital budget, which means that
there is not enough treasury to meet all payments.

Example: In our example, the solvency limit amounts to -150,000 (um). Let's
imagine that during year 1 of the project, 100,000 collections and 160,000
payments are obtained, the treasury balance for this period would be -60,000
(100,000 – 160,000). To calculate the accumulated balance of period 1, we add -
100,000 (initial contribution) to the treasury balance of the initial period -60,000,
obtaining an amount of -160,000. As you can see, it is less than the solvency limit (-
150,000), which indicates that we will have solvency problems. Another way of
looking at it would be to verify that the working capital budget (normally treasury
saved to avoid mismatches in collections and payments) amounts to 50,000, and
since the excess of payments over collections is 60,000, that is, greater than the
allocated budget, We would need those 10,000 to be able to make the payments.

Page: 25
 Working Capital Need

There will be a need for working capital if, in any projection period, the
accumulated balance of the project is less than the limit of financial solvency. In this
period, it would be necessary to have a greater volume of working capital. The need
for working capital is calculated as:

Current Capital Need = Minimum Accumulated Cash Balance - Solvency Limit

Decision criteria

- If Working Capital Need <0: it will indicate the amount of working capital
necessary so that there are no solvency problems.

- If Working Capital Need>0: There will be no solvency problems.

Page: 26
2.1. Preparation of the base scenario
2.1.1. Base scenario concept

In order to carry out the economic-financial feasibility analysis of the project, not
only the initial investment budget must be taken into account, but also the future cash
flows that are expected to be obtained with it. This set of data, composed of initial
investment and future cash flows, is what we call the base case.

This scenario will be used as a basis to carry out the sensitivity analysis of the
project. Which will indicate how sensitive the project is to the possible errors discussed in
the sales projections or initial investment budget.

2.1.2. Elements necessary for its preparation

To carry out the projection of the project's cash flows we have:

- The initial investment budget.

- Financing Budget.
- The operating accounts.
- The collection and payment policy.

Let's look at each of them.

Initial investment budget

This budget has already been discussed in detail in section 1.1 Investment to be
made.

Financing budget

This budget has already been discussed in detail in section 1.2 Project financing.

Operating accounts

In order to prepare the cash flows of the project, it is necessary to prepare the
operating accounts for each of the 10 years that the project is estimated to last. From
these accounts and depending on the collection and payment policy that is intended to be
carried out, the annual cash flows can be obtained.
The operating accounts are shown in Annex I. Here we will simply show the
foreseeable evolution of the annual net profit.

Page: 27
 As can be seen in the graph, in the initial period a net loss of -€11,497.05 is
obtained, which corresponds to the costs of establishing the requested loan net of taxes.
Furthermore, it is observed how the maximum benefit is obtained in 2019 with an amount
of €195,887.85.

Collections and Payments Policy

When preparing cash flows, it is vitally important to determine the collection and
payment policy that will be followed. In such a way that the longer the collection period
we grant to our clients and the shorter the payment period to our suppliers, the lower the
cash flow generated will be and vice versa. Well, after a thorough study of the sector of
activity in which the future project is limited, the average collection periods for clients
amount to 30 days and payment to suppliers 60 days.

Page: 28
2.1.3. Base Scenario Analysis

Starting from the four elements necessary for the preparation of the flows, such as
the initial investment budget, financing budget, profit and loss accounts and
collection/payment policy and applying the hypotheses for the construction of the flows
discussed in the Annex I. The following annual cash flows have been obtained, which we
show in the attached graph.

Once the value of the cash flows of the base scenario has been obtained, and after
applying the economic-financial analysis tools, the conclusions shown in the following
table have been obtained:

Page: 29
 Economic Analysis (profitability)
Indicator Worth Decision Financial Analysis (solvency)

GO
(10.00% minimum Project The project will not have
738.245,28 €
profitability) acceptance. solvency problems.

31,85 Project
IRR
acceptance.
IRR>Minimum
profitability.

Accumulated
Cash Flows at
the end of the Project
1.712.915,49 €
Project acceptance.

Conclusions
Economic analysis Financial analysis

Economically viable Financially viable.

Based on the results obtained, we can conclude that:

Page: 30
2.1.4. Base Scenario Analysis

Conclusions Economic Viability

The project proves to be profitable, achieving a profitability of 31.85%

(IRR), higher than the minimum profitability required by the promoters, which
amounts to 10.00%. Furthermore, the accumulated cash flows at the end of the
project will amount to €1,712,915.49.

Conclusions Financial Viability

The project will not have solvency problems. Since the investment
budget in working capital will not be exceeded at any time.

Page: 31
2.2. Sensitivity analysis
Whenever a feasibility analysis is carried out, it must be completed with a
sensitivity analysis. This analysis will be aimed at seeing how sensitive the project is
to certain variations in certain variables that are difficult to estimate (such as future
income or the initial fixed asset investment budget). This sensitivity will give us a
clear measure of the risk assumed when carrying out the project , since the more
sensitive it is to the variation of variables (for example volume of income), the more
risk will be taken when carrying it out. cape.

Well, in our case the most difficult variables to quantify are sales income and
the initial investment budget. We can quantify the rest of the variables, such as
operating expenses, and keep them controlled through a carefully prepared budget,
but sales income is normally only estimates and therefore not 100% certain. It is
interesting to see how the profitability and solvency of the project react to deviations
from estimated sales. We have considered the same with the initial investment
budget, since although this is normally signed in advance, no one is aware that it is
common that as the project develops, this budget suffers deviations that normally
increase it, these deviations are the that we will take into account.

From what was discussed above, it follows that our sensitivity analysis will be
aimed at seeing how sensitive the variables used to measure profitability and
solvency are to negative variations (errors) in the level of sales and the investment
budget. These variations are:

Sales Level: What we will do is, starting from the base scenario, see how the
decision variables (NPV, IRR...) react to possible errors in sales or income. We
perform the analysis assuming that actual sales are lower than those projected
in the base scenario. We will start from a 0% error (actual sales are equal to
those in the base scenario) to a 45% error (that is, actual sales are 45% lower
than those estimated in the base scenario).

Investment budget: What will be considered here is that the investment

budget increases with respect to the base scenario budget. We will start from
an error of 0% (the real investment budget is equal to that estimated in the
base scenario) to a 45% error (the real investment budget is 45% higher than
that of the base scenario). When carrying out this sensitivity analysis, it has
been considered that the supposed increase will be 100% financed by own
funds. Since the external funds (loans) have already been requested based on
the initial budget and there is no guarantee that the financing will be
expanded, in such a way that the project promoters themselves will have to
cover this increase in the budget. .

To carry out the sensitivity analysis, we have built sensitivity tables for each of
the methods or decision tools (NPV, IRR, ETC...). These tables show in the columns
the sensitivity to the decrease in

Page: 32
 sales and in the rows the sensitivity to the increase in the initial investment
budget, in the center of the table the value of the analyzed indicator is shown. Let's
look at each of them.
2.2.1. Economic sensitivity (Profitability)

To check the sensitivity of the project in the economic aspect, we will see the
sensitivity of the NPV and IRR to variations in sales and the investment budget.

NPV Sensitivity

Below we show the NPV sensitivity table:

0 5 10 15 20 25 30 35 40 45
738.245 € 819.8986 501.751 6 383.504 6 265.2576 147.0106 28.7636 ■89.4846 ■208.5566 ■348.1506

686.4196 568.1726 449.9256 331.6786 213.4316 95.1846 ■23.0636 141.311 6 ■260.5456 ■402.1096
% Investment Increase

634.593 6 516.3466 398.0996 279.8528 161.6056 43.3586 ■74.890 6 ■193.1376 ■312.6098 ■456.0696
582.767 6 464.5208 346.2736 228 0268 109 7796 ■8.4696 -126.7166 -244.9636 -364.691 8 ■510.0296

530.941 6 412.6946 294.4476 176.1996 57.9526 -60.2956 -178.5426 •296.7896 -416.7806 ■563.9886
479.1156 360.8686 242.6206 124.3736 6.1266 ■112.121 6 -230.3686 ■348.6156 -468.9666 ■617.9486
427.289 6 309.041 6 190.7946 72.547 8 ■45.7006 ■163.9476 ■282.1946 ■400.441 6 ■521.1536 ■671.907 6
375.4626 257.2156 138.9686 20.721 6 ■97.5266 ■215.7736 ■334.0206 ■452.2676 ■573.3806 ■725.8676
323.6366 205.3896 87.1426 •31.105 6 ■149.3526 ■267.5996 ■385.8466 504.1146 •625.681 6 •779.8276
271.8106 153.5636 35.3166 ■82.931 8 ■201.1786 ■319.4256 ■437.6726 ■555.971 6 ■677.981 6 ■833.7866

First we will see the sensitivity of the project to each variable separately to
later check the different combinations of sensitivity that exist between sales error
and the initial budget.

Sensitivity to error in sales

In this section, the sensitivity of the project's profitability to the negative

variation (error) in income or sales volume is analyzed, assuming that the
investment budget will not be increased. That is, assuming that no error has been
made in the initial investment budget, we will check at what level (in percentage)
sales can decrease until the project is no longer profitable.

As can be seen in the sensitivity table for the NPV, in the base scenario (upper
left corner) the NPV is positive, that is, if both the real sales volume and the initial
investment budget were exactly the same as those established for the elaboration of
this scenario, the project would be profitable. With respect to the sales budget, the
project has a certain margin of error, since it would only cease to be
profitable (as long as there was no error in the investment budget) if income
decreased by more than 30.00% with respect to to those initially budgeted.

Sensitivity to increase in the investment budget

Unlike the previous section, here the sensitivity of the project's profitability to
the negative variation in the investment budget is analyzed, assuming that no error
has been made in the income or sales volume. In this case, the variation of the
investment budget will be negative, if the initial budget is increased to a certain

Page: 33
extent. Furthermore, it has been considered that the supposed increase will be
financed 100% by own funds, which will logically cause the NPV to be decreased,
since the flows obtained will be the same, but the investment made will be greater.

As mentioned in the previous section, under the assumptions of the base

scenario, the project proves to be profitable. Furthermore, it should be noted that
from the point of view of the investment budget, the project has a margin of
error, since it would only cease to be profitable if the initial budget were
increased by more than 45.00%.

Joint sensitivity

Unlike the previous sections, here we analyze the sensitivity of the project's
profitability to the negative variation in the sales budget, together with the possible
increase in the investment budget. This analysis will indicate pairs of values (Error %
sales, Error % investment budget) limits or borders, which will make the project no
longer profitable. We call this set of pairs of values the Project Profitability Frontier.
This PROFITABILITY FRONTIER OF THE PROJECT is telling us how safe it is . This
border is marked in the sensitivity table and is marked by the cells in red.

As can be seen in the table, there are several pairs of values below which the
project is profitable. For example, we find the pair (30.00%, 0.00%), which implies
that at a maximum decrease in sales of 30.00%, the maximum increase that can
occur in the investment budget amounts to 0.00%, since a higher increase would
make the project unprofitable.

Page: 34
 TIR sensitivity

Below we show the TIR sensitivity table:

10 15 20 25 30
31,85 % 28.65X 25.45X 22.05X 18.55% 14.85X 10,95%
28.85X 25.85X 22.85X 18.85X 18.35X 12.85X 8.25X
% Investment Increase

26.25X 23.55X 20.65X 17.65X 14.55X 11,25% 7.75X

24.05 % 21.45 18.65X 15.85X 12.85X 8.75X 6.45X

22,05 % 19.55X 16.95% 14,25% 11.45X 8.45X 5.35X

20,35 % 15.45X 12.85X 10.15X 7.25X 4.25X

30 18.75X 16.45X 14.05 11.55X 8.85X 6.25X 3.35X

35 17,35% 15,15% 12,85% 10,45% 7.85X 5.25X 2.45X

40 16,05% 13,95% 11.75X 8.35X 6.85X 4.35X 1.65X
10,65% 8.45X 6.05X 3.55X 0.85X
45 14.85X 12.85X

The decision criteria and therefore sensitivity of the IRR are identical to the NPV
criteria.

Looking at the table, you can see how there are cells with orange color, this indicates
that for that set of values, the IRR of the project, even though it is positive, does not reach
the minimum required profitability level.
2.2.2. Financial sensitivity (solvency)

Sensitivity Circulating Capital Need

To check the sensitivity of the project in the financial aspect, we will see the sensitivity
of the need for working capital to variations in sales and the investment budget. So if at any
time the need for working capital was negative, this would indicate that the project would
show solvency problems. Below we show the table of working capital needs.

c mgi
h I I write down uU oulnwuau: wiawmuau rimanuiula 1
MAJD) —
Sales IsmTnución
T0 5 45
1
AN 0 10 15 20 25 30 35 40
D
0 50.000 € 50.0000 50.0000 50.000 € 50.0000 50.0000 50.0000 50.0000 50.0000 36.7140
l 5 50.0000 50.0000 50.0000 50.000 0 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
either
S 10 50.000 € 50.0000 50.0000 50.000 0 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
c
15 50.0000 50.0000 50.0000 50,000 e 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
Q
20 50.0000 50.0000 50.0000 50.000 € 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
4n

either 25 50.0000 50.0000 50.0000 50.000 0 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
30 50.0000 50.0000 50.0000 50.000 0 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
AN
D 35 50.0000 50.0000 50.0000 50.000 € 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
either

Page: 35
 c 40 50.0000 50.0000 50.0000 50.000 € 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
or 45 50.0000 50.0000 50.0000 50.000 0 50.0000 50.0000 50.0000 50.000 0 50.0000 36.7140
-
©

As can be seen in the table, the project, considering that the initial investment budget
is not increased, could support a decrease in sales of up to 45.00%.

If we consider that sales were as projected in the base scenario, the project could
support an increase in the investment budget of 45.00% without having solvency problems.

Page: 36
Page: 37
3. Annex I: Methodology and Hypotheses

3.0. Method and hypotheses used in the flows

When constructing the cash flows that must be taken into account for the analysis of
the feasibility of the project, the direct method of construction of flows has been used and
certain hypotheses have been taken into account that we will now comment on.

3.0.1. Direct method for constructing flows

This method has been used as opposed to the “Indirect Method”, considering it more
intuitive and easy to understand by users lay in finance.

In this method, to calculate cash flows, the items in the operating account and
investment budget that involve cash movements are simply grouped by nature (operating
flows, investment flows and financing flows), that is, , collections and payments.

However, as mentioned in the previous paragraph, in order to calculate cash flows, the
operating account for each year must first be calculated, for which in turn the investment
budget must be taken into account (already that based on it, the amount of amortization will
be calculated, which will affect the company's results and the profit tax) and the sources of
financing (which will also affect the financial result and therefore the profit tax or the result of
exploitation if there are subsidies). We will not comment on these steps, since the calculation
of the profit and loss account and the investment budget is well known. Therefore, we will
now describe how the cash flows have been calculated.

Page: 38
 1. Operating Cash Flows

The first type of flow, which must be calculated, is the operating cash flow.
These flows are the collections and payments that are generated by the
development of the activity itself. They are closely related to the company's
operating results, which is why they emanate from the operating account. The
games are:

• Operating charges: they are made up of:

• Collections from Sales Income: These are the income from the
profit and loss account, collected during the year. For this
project, the customer collection policy is 30 days, therefore, the
amount of those 30 days will have to be subtracted from the
sales income, to calculate the sales collections, in such a way
that this amount will be added in the following year. However, it
is considered that the last year of the projection is charged for
everything that is sold. This amount is based on the tax base,
that is, without considering VAT.

• Collections for Other operating income: It is the same as the

previous item, but on the heading, Other operating income of the
operating account.

• Operating payments: they are made up of:

• Payments for Merchandise and Supplies: These are the payments
made for the purchases of merchandise and other supplies
recorded in the operating account. These payments will be
reduced by the company's payment policy. For this project,
payments will be within 60 days. , so the amount of these 60
days will be subtracted from the payment amount, adding it in
the following year. However, in the last period everything
purchased will be considered to be paid for. As with income, the
amount is based on the tax base.

• Payments for Salaries and salaries: These are the payments

made for these concepts and are recorded in the profit and loss
account, under the heading, personnel expenses.

• Payments for other expenses: These are payments made based

on the other expenses heading of the profit and loss account.
The company's payment policy will also be taken into account.

• Collections or Payments for profit tax: These are the balances in favor or
against the profit tax.

2. Investment Cash Flows

These cash flows are determined by the initial investment budget. They are

Page: 39
made up of:

• Investment payments. These payments are those recorded in the initial

period, and are made up of:

• Investment in intangible or immaterial assets: These are the

payments made for these concepts and that are considered in
the tax base, that is, without taking VAT into account.

• Investment in material or tangible assets : These are the

payments made for these concepts and that are considered in
the tax base, that is, without taking VAT into account.

• Investment in working capital: This heading consists of two

items, which are added to said heading in the initial period and
are recovered throughout the project. These are:

o Investment in working capital: Amount consigned as

reserved funds so that the project does not have solvency
problems. This amount is considered to be recovered upon
completion of the project, which is why it is recorded
positively in the last year of projection.

o Investment VAT: VAT amount from the initial investment

budget. This amount will be considered to be collected in
the second period (when returned by the Treasury), which
is why it is recorded positively in the second projection
period.

• Investment charges. There are possible charges obtained from the sale
of the fixed assets once the exploitation of the project has been abandoned. The
residual value is recorded as positive in the last period.

Page: 40
 3. Financing Cash Flows

These cash flows are determined by the sources of financing of the project.
The project may be financed, in addition to its own resources (which are the initial
cash balance of the project), by external resources, which may be loans and
subsidies.

• Financing Charges. These charges can be for:

• Obtaining a loan: It will be recorded in the initial period, for the
total amount of the loan (this will be reduced by the commissions
that are entered in the interest payments section).

• Subsidies: The subsidies, even if they are granted at the

beginning of the activity, are considered to be collected in 2012,
since there are normally delays in making them effective.
However, the allocation of subsidies in the profit and loss
account is carried out from year 1, in heading " 9. Allocation of
subsidies for non-financial assets and others.

•
Financing Payments: These payments are those related to the
repayment of the loan. They are made up of:

• Debt repayment: These are the payments made for the

amortization of the loan principal. It should be noted that if the
project had a duration shorter than the life of the loan (for
example if the project lasted 5 years and the loan was amortized
in 10 years), in the last period of the project's cash flow, a
payment will be considered for the total amount of the
outstanding debt, so that it is settled.

• Interest: These are the payments made by the part of the

installment that corresponds to interest. It should be noted that
the amount recorded in the initial period is related to the loan
commissions.

Once the Exploitation, Investment and Financing cash flows have been
calculated by difference between receipts and payments, the only thing left to do is
add the 3 flows to obtain the cash flow for the period. Finally, we want to comment
that in the initial period, the cash flow is always negative. This is marked because
the collections are lower than the payments. This difference (or negative balance) is
precisely the amount that the promoters will have to contribute to the project and it
is on that amount that the profitability calculation will be made.

3.0.2. Hypotheses for the construction of flows

The main assumptions or restrictions that have been taken into account when
calculating the flows are:

Page: 41
 Hypotheses regarding VAT

It has been considered that the only VAT that can affect the project is the
initial Investment VAT due to its amount, which will be recovered in the second year
of activity. Therefore, the input and output VAT on exploitation will not be taken into
account, since due to the neutral nature of the tax, this VAT will be self-assessed
(the input fees are offset by those input and if there is a difference, this will be paid
with what was previously will have been charged to clients) without affecting the
profitability or solvency of the project.

Hypotheses Concerning Inflation

It has been considered that inflation (which has been quantified at 3.00%
annually) will affect expenses, which will negatively affect the calculated cash flows,
however, we may pass on part of that inflation to our customers. income,
specifically 3.00%, which will mitigate part of the effect of inflation.
Hypotheses concerning sensitivity analysis

When carrying out the sensitivity analysis of cash flows to the variation in
sales volume, it has been considered that the expenses corresponding to supplies
are variable, that is, they will decrease at the same rate as sales, so so that the
contribution margin projected in the base scenario will be maintained.

The rest of the operating expenses have been considered fixed, such that the
decrease in sales volume will not be accompanied by a decrease in these operating
expenses.

The explanation of this measure is very simple, it is based on the "Principle of

Prudence", since by making all operating expenses fixed (except supplies), the worst
possible scenario has been considered, that is, the one in which The company will
not have the flexibility to reduce costs (since only supply costs will be reduced), so if
the project is capable of showing profitability in this scenario, any possibility of cost
reduction (in the face of a reduction in income) will be What it would do is improve
the profitability calculated in our analysis.

Page: 42