Population Services International: The Social Marketing Project in Bangladesh (Abridged) 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 Population Services International: The Social Marketing Project in Bangladesh (Abridged) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Population Services International: The Social Marketing Project in Bangladesh (Abridged) case study is a Harvard Business School (HBR) case study written by James E. Austin. The Population Services International: The Social Marketing Project in Bangladesh (Abridged) (referred as “Psi Maya” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Emerging markets, Marketing.

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 Population Services International: The Social Marketing Project in Bangladesh (Abridged) Case Study

Population Services International (PSI) was a not-for-profit agency founded to disseminate family planning information and to market birth control products, primarily in less developed countries seeking to curb their population explosions. In 1976, PSI concluded an agreement with the government of Bangladesh to conduct a social marketing program, with the objective of using modern marketing techniques to sell subsidized contraceptives through commercial outlets. Seven years later, three PSI managers were meeting at PSI's Washington, D.C. headquarters to discuss 1984-86 marketing strategy for two products: Raja condoms and Maya birth control pills. Of particular concern was the fact that the marketing approach that had proven extremely successful for Raja was yielding poor sales results for Maya. The PSI managers needed to devise an action plan for improving Maya sales.

Case Authors : James E. Austin

Topic : Sales & Marketing

Related Areas : Emerging markets, Marketing

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Calculating Net Present Value (NPV) at 6% for Population Services International: The Social Marketing Project in Bangladesh (Abridged) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10022351)	-10022351	-	-
Year 1	3465188	-6557163	3465188	0.9434	3269045
Year 2	3955334	-2601829	7420522	0.89	3520233
Year 3	3950178	1348349	11370700	0.8396	3316646
Year 4	3237380	4585729	14608080	0.7921	2564308
TOTAL			14608080		12670232

The Net Present Value at 6% discount rate is 2647881

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. Net Present Value
2. Internal Rate of Return
3. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Psi Maya 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 Psi Maya 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 Population Services International: The Social Marketing Project in Bangladesh (Abridged)

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 Psi Maya 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 Psi Maya 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	(10022351)	-10022351	-	-
Year 1	3465188	-6557163	3465188	0.8696	3013207
Year 2	3955334	-2601829	7420522	0.7561	2990801
Year 3	3950178	1348349	11370700	0.6575	2597306
Year 4	3237380	4585729	14608080	0.5718	1850983
TOTAL					10452296

The Net NPV after 4 years is 429945

(10452296 - 10022351 )

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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	(10022351)	-10022351	-	-
Year 1	3465188	-6557163	3465188	0.8333	2887657
Year 2	3955334	-2601829	7420522	0.6944	2746760
Year 3	3950178	1348349	11370700	0.5787	2285983
Year 4	3237380	4585729	14608080	0.4823	1561236
TOTAL					9481636

The Net NPV after 4 years is -540715

At 20% discount rate the NPV is negative (9481636 - 10022351 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Psi Maya 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 Psi Maya has a NPV value higher than Zero then finance managers at Psi Maya 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 Psi Maya, then the stock price of the Psi Maya 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 Psi Maya 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 will be a multi year spillover effect of various taxation regulations.

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

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.

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 Population Services International: The Social Marketing Project in Bangladesh (Abridged)

References & Further Readings

James E. Austin (2018), "Population Services International: The Social Marketing Project in Bangladesh (Abridged) Harvard Business Review Case Study. Published by HBR Publications.