DaimlerChrysler: The Post-Merger Integration Phase 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 DaimlerChrysler: The Post-Merger Integration Phase case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. DaimlerChrysler: The Post-Merger Integration Phase case study is a Harvard Business School (HBR) case study written by Piero Morosini, George Radler. The DaimlerChrysler: The Post-Merger Integration Phase (referred as “Merger Daimler” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Cross-cultural management, Globalization, Mergers & acquisitions, Strategy execution.

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

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Case Description of DaimlerChrysler: The Post-Merger Integration Phase Case Study

Provides an inside view on how the former Daimler-Benz and Chrysler companies organized their integration efforts following their May 1998 merger, the first truly transatlantic merger in history and, at the time, the largest ever. As such, this merger presents an unusually broad array of management issues that were both unprecedented in scope and rather unique, ranging from cross-cultural management and global strategy and implementation to international M&A alliances and change management. Describes a journey that started during the early 1980s, until the events that preceded the Daimler-Chrysler merger, outlining the key strategic, organizational, and execution challenges facing both companies.

Case Authors : Piero Morosini, George Radler

Topic : Organizational Development

Related Areas : Cross-cultural management, Globalization, Mergers & acquisitions, Strategy execution

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Calculating Net Present Value (NPV) at 6% for DaimlerChrysler: The Post-Merger Integration Phase Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10028691)	-10028691	-	-
Year 1	3458418	-6570273	3458418	0.9434	3262658
Year 2	3957414	-2612859	7415832	0.89	3522084
Year 3	3972524	1359665	11388356	0.8396	3335408
Year 4	3224937	4584602	14613293	0.7921	2554452
TOTAL			14613293		12674603

The Net Present Value at 6% discount rate is 2645912

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.

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

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Formula and Steps to Calculate Net Present Value (NPV) of DaimlerChrysler: The Post-Merger Integration Phase

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 Merger Daimler 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 Merger Daimler 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	(10028691)	-10028691	-	-
Year 1	3458418	-6570273	3458418	0.8696	3007320
Year 2	3957414	-2612859	7415832	0.7561	2992374
Year 3	3972524	1359665	11388356	0.6575	2611999
Year 4	3224937	4584602	14613293	0.5718	1843868
TOTAL					10455561

The Net NPV after 4 years is 426870

(10455561 - 10028691 )

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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	(10028691)	-10028691	-	-
Year 1	3458418	-6570273	3458418	0.8333	2882015
Year 2	3957414	-2612859	7415832	0.6944	2748204
Year 3	3972524	1359665	11388356	0.5787	2298914
Year 4	3224937	4584602	14613293	0.4823	1555236
TOTAL					9484369

The Net NPV after 4 years is -544322

At 20% discount rate the NPV is negative (9484369 - 10028691 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Merger Daimler 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 Merger Daimler has a NPV value higher than Zero then finance managers at Merger Daimler 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 Merger Daimler, then the stock price of the Merger Daimler 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 Merger Daimler 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 –

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.

What can impact the cash flow of the project.

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.

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.

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Negotiation Strategy of DaimlerChrysler: The Post-Merger Integration Phase

References & Further Readings

Piero Morosini, George Radler (2018), "DaimlerChrysler: The Post-Merger Integration Phase Harvard Business Review Case Study. Published by HBR Publications.