×




Marketing Chateau Margaux 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 Marketing Chateau Margaux case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Marketing Chateau Margaux case study is a Harvard Business School (HBR) case study written by John Deighton, Vincent Dessain, Leyland Pitt, Daniela Beyersdorfer. The Marketing Chateau Margaux (referred as “Chateau Margaux” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Pricing.

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 Marketing Chateau Margaux Case Study


Chateau Margaux, luxury brand or connoisseur brand? Although France is awash with unsold wine, demand has never been stronger for the very finest Bordeaux. How should Margaux sustain and grow its business? The Chateau management team is wondering if it can take more control of distribution instead of leaving it to the Bordeaux wine merchants. Also, can the Chateau build marketing and sales capabilities on its own? Who is the target market, wine connoisseurs or the newly rich? Corinne Mentzelopoulous, who took over the estate from her father in 1980, wonders whether a new lower-priced wine should be added to the portfolio.


Case Authors : John Deighton, Vincent Dessain, Leyland Pitt, Daniela Beyersdorfer

Topic : Sales & Marketing

Related Areas : Pricing




Calculating Net Present Value (NPV) at 6% for Marketing Chateau Margaux Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10000816) -10000816 - -
Year 1 3459594 -6541222 3459594 0.9434 3263768
Year 2 3956350 -2584872 7415944 0.89 3521137
Year 3 3952607 1367735 11368551 0.8396 3318685
Year 4 3245667 4613402 14614218 0.7921 2570872
TOTAL 14614218 12674463




The Net Present Value at 6% discount rate is 2673647

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

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 Chateau Margaux 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. Chateau Margaux shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.






Formula and Steps to Calculate Net Present Value (NPV) of Marketing Chateau Margaux

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 Chateau Margaux 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 Chateau Margaux 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 (10000816) -10000816 - -
Year 1 3459594 -6541222 3459594 0.8696 3008343
Year 2 3956350 -2584872 7415944 0.7561 2991569
Year 3 3952607 1367735 11368551 0.6575 2598903
Year 4 3245667 4613402 14614218 0.5718 1855721
TOTAL 10454536


The Net NPV after 4 years is 453720

(10454536 - 10000816 )








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 (10000816) -10000816 - -
Year 1 3459594 -6541222 3459594 0.8333 2882995
Year 2 3956350 -2584872 7415944 0.6944 2747465
Year 3 3952607 1367735 11368551 0.5787 2287388
Year 4 3245667 4613402 14614218 0.4823 1565233
TOTAL 9483082


The Net NPV after 4 years is -517734

At 20% discount rate the NPV is negative (9483082 - 10000816 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Chateau Margaux 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 Chateau Margaux has a NPV value higher than Zero then finance managers at Chateau Margaux 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 Chateau Margaux, then the stock price of the Chateau Margaux 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 Chateau Margaux 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.

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

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 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.






Negotiation Strategy of Marketing Chateau Margaux

References & Further Readings

John Deighton, Vincent Dessain, Leyland Pitt, Daniela Beyersdorfer (2018), "Marketing Chateau Margaux Harvard Business Review Case Study. Published by HBR Publications.


Barbara Bui SWOT Analysis / TOWS Matrix

Consumer Cyclical , Apparel/Accessories


Cross Cat SWOT Analysis / TOWS Matrix

Technology , Software & Programming


CHS Inc CM Pref SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Crops


Interworks SWOT Analysis / TOWS Matrix

Services , Business Services


BH Macro SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


China Financial Leasing SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Banca Generali SWOT Analysis / TOWS Matrix

Financial , Investment Services


Pae Ltd SWOT Analysis / TOWS Matrix

Technology , Electronic Instr. & Controls


New World Department Store China SWOT Analysis / TOWS Matrix

Services , Retail (Department & Discount)


Mitsuboshi Belting SWOT Analysis / TOWS Matrix

Basic Materials , Fabricated Plastic & Rubber


Yamato International SWOT Analysis / TOWS Matrix

Consumer Cyclical , Apparel/Accessories