The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces 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 The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces case study is a Harvard Business School (HBR) case study written by Robert A. Burgelman, Debra Schifrin. The The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces (referred as “Electric Car” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, .

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 The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces Case Study

This case covers the electric vehicle industry, starting with the history of the electric car and then moving on to the forces driving the twenty-first century automotive industry toward electrification. These include: Government incentives for buying electric and plug-in hybrid vehicles, the economic and political problems related to oil dependency, the effect of oil prices on consumers' car buying habits, carbon dioxide emission and pollution awareness, and the effect of current and upcoming worldwide emissions regulations. The case then discusses the challenges to mass electric vehicle adoption including: the relatively higher price of certain electric vehicles; consumers' fear of "range anxiety" - the term for batteries running out of power in the middle of the road; and the narrow demographics of traditional hybrid buyers - which could be mirrored in the demographics of electric car buyers. Other challenges include: competition with internal combustion engines that were becoming more fuel efficient, time limits for government incentive programs, the new competitive market of small, more fuel efficient cars being produced and sold in China and India for less than $3,000, and the question of carbon footprint - the concept that coal is the major source of electricity production in the United States and China, and therefore electric vehicles may simply create a shift in carbon footprint from oil to coal. The case provides specific data about electric car and plug-hybrid brands, price, all-electric driving range and release dates. It also details government programs to promote electric vehicles, as well as current and future mandated miles per gallon for various countries. In addition, it provides data about worldwide and U.S. car sales, how far Americans drive and for what purpose, and psychographics of hybrid vehicle owners.

Case Authors : Robert A. Burgelman, Debra Schifrin

Topic : Sales & Marketing

Related Areas :

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Calculating Net Present Value (NPV) at 6% for The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10000810)	-10000810	-	-
Year 1	3457623	-6543187	3457623	0.9434	3261908
Year 2	3954909	-2588278	7412532	0.89	3519855
Year 3	3973669	1385391	11386201	0.8396	3336369
Year 4	3235694	4621085	14621895	0.7921	2562973
TOTAL			14621895		12681105

The Net Present Value at 6% discount rate is 2680295

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

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. Electric Car 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 Electric Car have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces

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 Sales & Marketing 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 Electric Car 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 Electric Car 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	(10000810)	-10000810	-	-
Year 1	3457623	-6543187	3457623	0.8696	3006629
Year 2	3954909	-2588278	7412532	0.7561	2990479
Year 3	3973669	1385391	11386201	0.6575	2612752
Year 4	3235694	4621085	14621895	0.5718	1850019
TOTAL					10459879

The Net NPV after 4 years is 459069

(10459879 - 10000810 )

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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	(10000810)	-10000810	-	-
Year 1	3457623	-6543187	3457623	0.8333	2881353
Year 2	3954909	-2588278	7412532	0.6944	2746465
Year 3	3973669	1385391	11386201	0.5787	2299577
Year 4	3235694	4621085	14621895	0.4823	1560423
TOTAL					9487817

The Net NPV after 4 years is -512993

At 20% discount rate the NPV is negative (9487817 - 10000810 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Electric Car 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 Electric Car has a NPV value higher than Zero then finance managers at Electric Car 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 Electric Car, then the stock price of the Electric Car 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 Electric Car 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 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.

Understanding of risks involved in the project.

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 The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces

References & Further Readings

Robert A. Burgelman, Debra Schifrin (2018), "The Growth of the Electric Vehicle Industry: Facilitating and Impeding Forces Harvard Business Review Case Study. Published by HBR Publications.