×




Bayer CropScience in India (A): Against Child Labor Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Bayer CropScience in India (A): Against Child Labor case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Bayer CropScience in India (A): Against Child Labor case study is a Harvard Business School (HBR) case study written by Satyajeet Subramanian, Charles Dhanaraj, Oana Branzei. The Bayer CropScience in India (A): Against Child Labor (referred as “Bayer Cropscience” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Cross-cultural management, Emerging markets, Leadership, Social responsibility, Strategy.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment




Case Description of Bayer CropScience in India (A): Against Child Labor Case Study


The case explores value-driven strategy formulation and implementation by bringing to the fore issues of ethics, responsible leadership, social intitiatives in emerging markets and the global-local tensions in corporate social responsibility. It examines how Bayer CropScience addressed the issue of child labour in its cotton seed supply chain in rural India between 2002 and 2008. Bayer had been operating in India for more than a century. In December 2002, the Bayer Group completed the acquisition of India-based Aventis CropScience. Bayer CropScience first learned about the incidence and prevalence of the child labour in its newly acquired India-based cotton seed operations a few months post acquisition, in April 2003. The Aventis acquisition had brought onboard a well-known Indian company, Proagro, which already had operations in the cotton seed production and marketing - a new segment of the supply chain for Bayer. Child labour was widespread in cotton seed production - a traditional practice taken for granted not only by Indian farmers but also by several hundred Indian companies then accounting for approximately 90 per cent of the market share. The (A) case focuses on Bayer's decision whether, when and how to launch a self-run program that would take direct responsibility for tracking and eradicating child labour in rural India.


Case Authors : Satyajeet Subramanian, Charles Dhanaraj, Oana Branzei

Topic : Leadership & Managing People

Related Areas : Cross-cultural management, Emerging markets, Leadership, Social responsibility, Strategy




Calculating Net Present Value (NPV) at 6% for Bayer CropScience in India (A): Against Child Labor Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10005275) -10005275 - -
Year 1 3468777 -6536498 3468777 0.9434 3272431
Year 2 3958558 -2577940 7427335 0.89 3523103
Year 3 3945875 1367935 11373210 0.8396 3313033
Year 4 3238160 4606095 14611370 0.7921 2564926
TOTAL 14611370 12673492


The Net Present Value at 6% discount rate is 2668217

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting


What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.




Capital Budgeting Approaches

Methods of Capital Budgeting


There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Payback Period
2. Internal Rate of Return
3. Profitability Index
4. Net Present Value

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Bayer Cropscience shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Bayer Cropscience have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of Bayer CropScience in India (A): Against Child Labor

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Leadership & Managing People Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Bayer Cropscience often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Bayer Cropscience needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 15 %
Discounted
Cash Flows
Year 0 (10005275) -10005275 - -
Year 1 3468777 -6536498 3468777 0.8696 3016328
Year 2 3958558 -2577940 7427335 0.7561 2993239
Year 3 3945875 1367935 11373210 0.6575 2594477
Year 4 3238160 4606095 14611370 0.5718 1851428
TOTAL 10455472


The Net NPV after 4 years is 450197

(10455472 - 10005275 )






Calculating Net Present Value (NPV) at 20%


If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 20 %
Discounted
Cash Flows
Year 0 (10005275) -10005275 - -
Year 1 3468777 -6536498 3468777 0.8333 2890648
Year 2 3958558 -2577940 7427335 0.6944 2748999
Year 3 3945875 1367935 11373210 0.5787 2283492
Year 4 3238160 4606095 14611370 0.4823 1561613
TOTAL 9484751


The Net NPV after 4 years is -520524

At 20% discount rate the NPV is negative (9484751 - 10005275 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Bayer Cropscience to discount cash flow at lower discount rates such as 15%.



Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Bayer Cropscience has a NPV value higher than Zero then finance managers at Bayer Cropscience can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Bayer Cropscience, then the stock price of the Bayer Cropscience should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Bayer Cropscience should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What can impact the cash flow of the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.




References & Further Readings

Satyajeet Subramanian, Charles Dhanaraj, Oana Branzei (2018), "Bayer CropScience in India (A): Against Child Labor Harvard Business Review Case Study. Published by HBR Publications.