Tour Planning at Cirque du Soleil, 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 Tour Planning at Cirque du Soleil, Spanish Version case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Tour Planning at Cirque du Soleil, Spanish Version case study is a Harvard Business School (HBR) case study written by Marie-Helene Jobin, Jean Talbot. The Tour Planning at Cirque du Soleil, Spanish Version (referred as “Louise Planning” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Organizational culture, Project management.

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 Tour Planning at Cirque du Soleil, Spanish Version Case Study

Louise Murray, Vice-President of Tour Planning and Partnerships at Cirque du Soleil, has been informed that the company has received two unsolicited partnership proposals to present a show in Istanbul, Turkey. Both offers are serious and the projects are potentially interesting. The first offer comes from a government agency in partnership with the City of Istanbul, while the second was submitted by a leading Turkish media group. Louise Murray must now decide on the suitability of this destination and analyze the proposals themselves. She also has to assess the different scenarios for inserting this destination in Cirque's planning horizon and choose the best one. The choice of work and the type of partnership agreement to be negotiated with the potential promoter must also be decided. The tight deadlines imposed by the proposals are an opportunity for Louise to make a critical assessment of the flexibility of the planning process, which she has been working to standardize over the past few years. The case thus encourages a broader reflection on the delicate balance between flexibility and standardization in the context of an organization that still has a strong circus culture. As such, the case is an opportunity to reflect on the organization of the planning process and to propose improvements.

Case Authors : Marie-Helene Jobin, Jean Talbot

Topic : Organizational Development

Related Areas : Organizational culture, Project management

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Calculating Net Present Value (NPV) at 6% for Tour Planning at Cirque du Soleil, Spanish Version Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10005744)	-10005744	-	-
Year 1	3449333	-6556411	3449333	0.9434	3254088
Year 2	3974696	-2581715	7424029	0.89	3537465
Year 3	3965807	1384092	11389836	0.8396	3329768
Year 4	3241952	4626044	14631788	0.7921	2567930
TOTAL			14631788		12689251

The Net Present Value at 6% discount rate is 2683507

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. Internal Rate of Return
3. Net Present Value
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 Louise Planning 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. Louise Planning 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 Tour Planning at Cirque du Soleil, 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 Louise Planning 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 Louise Planning 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	(10005744)	-10005744	-	-
Year 1	3449333	-6556411	3449333	0.8696	2999420
Year 2	3974696	-2581715	7424029	0.7561	3005441
Year 3	3965807	1384092	11389836	0.6575	2607582
Year 4	3241952	4626044	14631788	0.5718	1853597
TOTAL					10466040

The Net NPV after 4 years is 460296

(10466040 - 10005744 )

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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	(10005744)	-10005744	-	-
Year 1	3449333	-6556411	3449333	0.8333	2874444
Year 2	3974696	-2581715	7424029	0.6944	2760206
Year 3	3965807	1384092	11389836	0.5787	2295027
Year 4	3241952	4626044	14631788	0.4823	1563441
TOTAL					9493118

The Net NPV after 4 years is -512626

At 20% discount rate the NPV is negative (9493118 - 10005744 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Louise Planning 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 Louise Planning has a NPV value higher than Zero then finance managers at Louise Planning 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 Louise Planning, then the stock price of the Louise Planning 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 Louise Planning 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.

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

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 Tour Planning at Cirque du Soleil, Spanish Version

References & Further Readings

Marie-Helene Jobin, Jean Talbot (2018), "Tour Planning at Cirque du Soleil, Spanish Version Harvard Business Review Case Study. Published by HBR Publications.