×




Marriott Corp. (A) 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 Marriott Corp. (A) case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Marriott Corp. (A) case study is a Harvard Business School (HBR) case study written by Lynn Sharp Paine, Charles A. Nichols. The Marriott Corp. (A) (referred as “Marriott Corp” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Corporate communications, Decision making, Ethics, Financial management, Financial markets, Reorganization.

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 Marriott Corp. (A) Case Study


Marriott Corp.'s chairman and CEO must decide whether to recommend a restructuring of the company to the board of directors. The proposal he is considering would split the Marriott Corp., a premier hotel developer, owner, and manager, into two separate companies by a stock dividend to shareholders. One of the new companies would contain most of Marriott Corp.'s profitable management operations, while the other would retain ownership of its hotel properties as well as most of its long-term debt.


Case Authors : Lynn Sharp Paine, Charles A. Nichols

Topic : Finance & Accounting

Related Areas : Corporate communications, Decision making, Ethics, Financial management, Financial markets, Reorganization




Calculating Net Present Value (NPV) at 6% for Marriott Corp. (A) Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10028628) -10028628 - -
Year 1 3470068 -6558560 3470068 0.9434 3273649
Year 2 3975536 -2583024 7445604 0.89 3538213
Year 3 3941438 1358414 11387042 0.8396 3309307
Year 4 3246976 4605390 14634018 0.7921 2571909
TOTAL 14634018 12693078




The Net Present Value at 6% discount rate is 2664450

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. Net Present Value
3. Profitability Index
4. Internal Rate of Return

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. Marriott Corp 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 Marriott Corp 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 Marriott Corp. (A)

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 Finance & Accounting 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 Marriott Corp 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 Marriott Corp 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 (10028628) -10028628 - -
Year 1 3470068 -6558560 3470068 0.8696 3017450
Year 2 3975536 -2583024 7445604 0.7561 3006076
Year 3 3941438 1358414 11387042 0.6575 2591559
Year 4 3246976 4605390 14634018 0.5718 1856469
TOTAL 10471555


The Net NPV after 4 years is 442927

(10471555 - 10028628 )








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 (10028628) -10028628 - -
Year 1 3470068 -6558560 3470068 0.8333 2891723
Year 2 3975536 -2583024 7445604 0.6944 2760789
Year 3 3941438 1358414 11387042 0.5787 2280925
Year 4 3246976 4605390 14634018 0.4823 1565864
TOTAL 9499301


The Net NPV after 4 years is -529327

At 20% discount rate the NPV is negative (9499301 - 10028628 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Marriott Corp 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 Marriott Corp has a NPV value higher than Zero then finance managers at Marriott Corp 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 Marriott Corp, then the stock price of the Marriott Corp 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 Marriott Corp 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 can impact the cash flow of the project.

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

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.

Understanding of risks involved in 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.






Negotiation Strategy of Marriott Corp. (A)

References & Further Readings

Lynn Sharp Paine, Charles A. Nichols (2018), "Marriott Corp. (A) Harvard Business Review Case Study. Published by HBR Publications.


Fukuda Corp SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Mitcham Industries A Pref SWOT Analysis / TOWS Matrix

Energy , Oil Well Services & Equipment


JS SWOT Analysis / TOWS Matrix

Consumer Cyclical , Apparel/Accessories


JPMorgan SWOT Analysis / TOWS Matrix

Financial , Investment Services


Jiangsu Lianyungang Port SWOT Analysis / TOWS Matrix

Transportation , Misc. Transportation


Godo Steel Ltd SWOT Analysis / TOWS Matrix

Basic Materials , Iron & Steel


SunKing Power Electronics SWOT Analysis / TOWS Matrix

Technology , Electronic Instr. & Controls


Korea Computer SWOT Analysis / TOWS Matrix

Technology , Electronic Instr. & Controls


Bowleven SWOT Analysis / TOWS Matrix

Energy , Oil & Gas Operations