State Bank of India: Kohinoor Banjara Branch 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 State Bank of India: Kohinoor Banjara Branch case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. State Bank of India: Kohinoor Banjara Branch case study is a Harvard Business School (HBR) case study written by Piyush Kumar, Rishtee Batra, Arohini Narain. The State Bank of India: Kohinoor Banjara Branch (referred as “Kohinoor Branch” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customer service, Supply chain.

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 State Bank of India: Kohinoor Banjara Branch Case Study

"State Bank of India: Kohinoor Banjara Branch is a case that documents the development and execution of a novel, high-end branch by a public sector bank in India whose original mandate was to be a "banker to every Indian." Specifically, it traces the development of the bank's Kohinoor branch to serve the Ultra High Net-Worth Individuals (UHNIs) in Hyderabad, the capital city of the state of Andhra Pradesh in India, and considers the question of whether a national rollout of the concept would be viable and successful. It describes the design and execution of the new branch from the twin perspectives of brand extension and new service operation, and raises questions related to the expansion of the idea on both dimensions, from a pilot level to a full-blown rollout. It also takes into account such factors as customer selection for the extension of a mass brand into the ultra-luxury end, the desired approach to serve such elite customers and the long-term prospects for a luxury extension of a mass service brand. Following the success of the branch in Hyderabad, SBI's associate bank, State Bank of Bikaner and Jaipur (SBBJ) planned to launch a Kohinoor-type branch in Jaipur. However, there were important concerns that had to be addressed. On the one hand, SBI had to break free of its legacy image of being an archaic organization, and on the other, it did not want to send out the signal that it was no longer a common man's bank. Given such challenges, SBI was faced with the question: Should it or should it not roll out Kohinoor-type branches across India? "

Case Authors : Piyush Kumar, Rishtee Batra, Arohini Narain

Topic : Sales & Marketing

Related Areas : Customer service, Supply chain

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Calculating Net Present Value (NPV) at 6% for State Bank of India: Kohinoor Banjara Branch Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10005471)	-10005471	-	-
Year 1	3447677	-6557794	3447677	0.9434	3252525
Year 2	3959361	-2598433	7407038	0.89	3523817
Year 3	3950230	1351797	11357268	0.8396	3316689
Year 4	3243194	4594991	14600462	0.7921	2568913
TOTAL			14600462		12661945

The Net Present Value at 6% discount rate is 2656474

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. Profitability Index
2. Internal Rate of Return
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. Kohinoor Branch 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 Kohinoor Branch 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 State Bank of India: Kohinoor Banjara Branch

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 Kohinoor Branch 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 Kohinoor Branch 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	(10005471)	-10005471	-	-
Year 1	3447677	-6557794	3447677	0.8696	2997980
Year 2	3959361	-2598433	7407038	0.7561	2993846
Year 3	3950230	1351797	11357268	0.6575	2597340
Year 4	3243194	4594991	14600462	0.5718	1854307
TOTAL					10443473

The Net NPV after 4 years is 438002

(10443473 - 10005471 )

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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	(10005471)	-10005471	-	-
Year 1	3447677	-6557794	3447677	0.8333	2873064
Year 2	3959361	-2598433	7407038	0.6944	2749556
Year 3	3950230	1351797	11357268	0.5787	2286013
Year 4	3243194	4594991	14600462	0.4823	1564040
TOTAL					9472673

The Net NPV after 4 years is -532798

At 20% discount rate the NPV is negative (9472673 - 10005471 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Kohinoor Branch 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 Kohinoor Branch has a NPV value higher than Zero then finance managers at Kohinoor Branch 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 Kohinoor Branch, then the stock price of the Kohinoor Branch 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 Kohinoor Branch 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 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 can impact the cash flow of the project.

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.

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 State Bank of India: Kohinoor Banjara Branch

References & Further Readings

Piyush Kumar, Rishtee Batra, Arohini Narain (2018), "State Bank of India: Kohinoor Banjara Branch Harvard Business Review Case Study. Published by HBR Publications.