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Corporate Social Responsibility at CANTV, Spanish Version 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 Corporate Social Responsibility at CANTV, Spanish Version case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Corporate Social Responsibility at CANTV, Spanish Version case study is a Harvard Business School (HBR) case study written by Maria H. Jaen, Patricia Marquez. The Corporate Social Responsibility at CANTV, Spanish Version (referred as “Cantv Social” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Social enterprise, Social responsibility.

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 Corporate Social Responsibility at CANTV, Spanish Version Case Study


At the close of 2004, CANTV was Venezuela's largest privately owned company. It operated in the telecom market, the only economic sector other than oil that enjoyed sustained growth in the 1990s. At the start of 2000, it faced growing competition, regulated tariffs, and deteriorating consumer purchasing power. The company focused efforts on cost containment and the introduction of new services. Although in 2004 the telecom sector rebounded, political instability, currency devaluation, and tariff regulation affected investment plans. Poses the challenge of designing a social responsibility strategy for a large, publicly traded Latin American company operating in a context of political instability, financial volatility, and growing poverty. President Gustavo Roosen felt CANTV should project a "grand and friendly" image to its stakeholders (customers, government, and suppliers, among others). The aim was to align the social portfolio with the image of a company that generated social (friendly) and economic value (grand). The company's social responsibility was implemented through a variety of programs. CANTV had placed emphasis on philanthropy by means of the Social Fund and other sponsorships, run from the Institutional Relations Department. In 2004 CANTV launched Super@ulas, a program aligned with the telecom business and managed from the Executive Vice President's office. Some of the company's top managers expressed concern in 2004 over the results generated by social contributions, and looked for synergistic opportunities--among them improved relations with the regulating agency and alignment with business objectives. The idea was to continue providing support to social agencies, many of which were at risk as a result of the shrinking number of grant sources and a government policy that sought total control over social programs.


Case Authors : Maria H. Jaen, Patricia Marquez

Topic : Organizational Development

Related Areas : Social enterprise, Social responsibility




Calculating Net Present Value (NPV) at 6% for Corporate Social Responsibility at CANTV, Spanish Version Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10000946) -10000946 - -
Year 1 3459079 -6541867 3459079 0.9434 3263282
Year 2 3970347 -2571520 7429426 0.89 3533595
Year 3 3945019 1373499 11374445 0.8396 3312314
Year 4 3234578 4608077 14609023 0.7921 2562089
TOTAL 14609023 12671280


The Net Present Value at 6% discount rate is 2670334

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

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. Cantv Social 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 Cantv Social 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 Corporate Social Responsibility at CANTV, Spanish Version

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 Organizational Development 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 Cantv Social 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 Cantv Social 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 (10000946) -10000946 - -
Year 1 3459079 -6541867 3459079 0.8696 3007895
Year 2 3970347 -2571520 7429426 0.7561 3002153
Year 3 3945019 1373499 11374445 0.6575 2593914
Year 4 3234578 4608077 14609023 0.5718 1849380
TOTAL 10453342


The Net NPV after 4 years is 452396

(10453342 - 10000946 )






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 (10000946) -10000946 - -
Year 1 3459079 -6541867 3459079 0.8333 2882566
Year 2 3970347 -2571520 7429426 0.6944 2757185
Year 3 3945019 1373499 11374445 0.5787 2282997
Year 4 3234578 4608077 14609023 0.4823 1559885
TOTAL 9482634


The Net NPV after 4 years is -518312

At 20% discount rate the NPV is negative (9482634 - 10000946 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Cantv Social 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 Cantv Social has a NPV value higher than Zero then finance managers at Cantv Social 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 Cantv Social, then the stock price of the Cantv Social 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 Cantv Social 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Understanding of risks involved in the project.

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

What can impact the cash flow of the project.

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

Maria H. Jaen, Patricia Marquez (2018), "Corporate Social Responsibility at CANTV, Spanish Version Harvard Business Review Case Study. Published by HBR Publications.