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ING DIRECT USA - Rebel With a Cause 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 ING DIRECT USA - Rebel With a Cause case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. ING DIRECT USA - Rebel With a Cause case study is a Harvard Business School (HBR) case study written by Adrian Ryans, Terry H. Deutscher, Stephanie Maria Sequeira. The ING DIRECT USA - Rebel With a Cause (referred as “Ing Direct” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Entrepreneurship, Innovation, Marketing.

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 ING DIRECT USA - Rebel With a Cause Case Study


Arkadi Kuhlmann launched ING DIRECT USA in 2000. The direct bank was very successful and by 2006 it had grown to be the largest online banking business and the 3rd largest savings-and-loan institution in the US. Faced with fierce and growing competition from both other direct banks and the online banking operations of such major traditional banks as Citibank and HSBC was faced with some tough decisions about how to move forward. One of the options under active consideration was the launch of a high interest paying checking or payments account. This was a product that ING DIRECT USA had always avoided in the past due to its complexity and high support costs. Learning objective: The challenges facing a successful low cost competitor as it responds to a changing market environment and increasing competitive pressure from established banks.


Case Authors : Adrian Ryans, Terry H. Deutscher, Stephanie Maria Sequeira

Topic : Organizational Development

Related Areas : Entrepreneurship, Innovation, Marketing




Calculating Net Present Value (NPV) at 6% for ING DIRECT USA - Rebel With a Cause Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10010616) -10010616 - -
Year 1 3444624 -6565992 3444624 0.9434 3249645
Year 2 3975421 -2590571 7420045 0.89 3538111
Year 3 3963532 1372961 11383577 0.8396 3327858
Year 4 3233406 4606367 14616983 0.7921 2561160
TOTAL 14616983 12676774




The Net Present Value at 6% discount rate is 2666158

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. 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. Ing Direct 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 Ing Direct 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 ING DIRECT USA - Rebel With a Cause

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 Ing Direct 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 Ing Direct 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 (10010616) -10010616 - -
Year 1 3444624 -6565992 3444624 0.8696 2995325
Year 2 3975421 -2590571 7420045 0.7561 3005989
Year 3 3963532 1372961 11383577 0.6575 2606087
Year 4 3233406 4606367 14616983 0.5718 1848710
TOTAL 10456112


The Net NPV after 4 years is 445496

(10456112 - 10010616 )








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 (10010616) -10010616 - -
Year 1 3444624 -6565992 3444624 0.8333 2870520
Year 2 3975421 -2590571 7420045 0.6944 2760709
Year 3 3963532 1372961 11383577 0.5787 2293711
Year 4 3233406 4606367 14616983 0.4823 1559320
TOTAL 9484260


The Net NPV after 4 years is -526356

At 20% discount rate the NPV is negative (9484260 - 10010616 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ing Direct 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 Ing Direct has a NPV value higher than Zero then finance managers at Ing Direct 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 Ing Direct, then the stock price of the Ing Direct 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 Ing Direct 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 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.

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.

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 ING DIRECT USA - Rebel With a Cause

References & Further Readings

Adrian Ryans, Terry H. Deutscher, Stephanie Maria Sequeira (2018), "ING DIRECT USA - Rebel With a Cause Harvard Business Review Case Study. Published by HBR Publications.


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