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Snapple, 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 Snapple, Spanish Version case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Snapple, Spanish Version case study is a Harvard Business School (HBR) case study written by John Deighton. The Snapple, Spanish Version (referred as “Snapple Quaker” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Entrepreneurship, Financial management, Growth strategy, Strategic planning.

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 Snapple, Spanish Version Case Study


This case is accompanied by a Video Short that can be shown in class or included in a digital coursepack. Instructors should consider the timing of making the video available to students, as it may reveal key case details.Tells the story of Snapple's rise and fall, and poses the question "Can it recover?" Many soft-drink brands flourished in the 1980s serving New York's Yuppies, but only Snapple made the big time. It went from local to national success and was poised to go international when the founders sold out to Quaker. The brand proved harder to manage than Quaker anticipated and in 1997 was sold for a fraction of its acquisition price. The case presents factors accounting for the growth and decline and provides a qualitative study of the brand. What action should the new owners take?


Case Authors : John Deighton

Topic : Sales & Marketing

Related Areas : Entrepreneurship, Financial management, Growth strategy, Strategic planning




Calculating Net Present Value (NPV) at 6% for Snapple, Spanish Version Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10011512) -10011512 - -
Year 1 3453444 -6558068 3453444 0.9434 3257966
Year 2 3959885 -2598183 7413329 0.89 3524284
Year 3 3968435 1370252 11381764 0.8396 3331975
Year 4 3246889 4617141 14628653 0.7921 2571840
TOTAL 14628653 12686064


The Net Present Value at 6% discount rate is 2674552

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. Payback Period
3. Profitability Index
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 Snapple Quaker 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. Snapple Quaker 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 Snapple, 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 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 Snapple Quaker 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 Snapple Quaker 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 (10011512) -10011512 - -
Year 1 3453444 -6558068 3453444 0.8696 3002995
Year 2 3959885 -2598183 7413329 0.7561 2994242
Year 3 3968435 1370252 11381764 0.6575 2609310
Year 4 3246889 4617141 14628653 0.5718 1856419
TOTAL 10462967


The Net NPV after 4 years is 451455

(10462967 - 10011512 )






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 (10011512) -10011512 - -
Year 1 3453444 -6558068 3453444 0.8333 2877870
Year 2 3959885 -2598183 7413329 0.6944 2749920
Year 3 3968435 1370252 11381764 0.5787 2296548
Year 4 3246889 4617141 14628653 0.4823 1565822
TOTAL 9490160


The Net NPV after 4 years is -521352

At 20% discount rate the NPV is negative (9490160 - 10011512 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Snapple Quaker 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 Snapple Quaker has a NPV value higher than Zero then finance managers at Snapple Quaker 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 Snapple Quaker, then the stock price of the Snapple Quaker 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 Snapple Quaker 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 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.

What will be a multi year spillover effect of various taxation regulations.

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.




References & Further Readings

John Deighton (2018), "Snapple, Spanish Version Harvard Business Review Case Study. Published by HBR Publications.