Infosys: The Challenge of Global Branding 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 Infosys: The Challenge of Global Branding case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Infosys: The Challenge of Global Branding case study is a Harvard Business School (HBR) case study written by Jeff Saperstein, Padmini Murty, Viren Desai. The Infosys: The Challenge of Global Branding (referred as “Infosys Outsourcing” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Competitive strategy, IT, Operations management.

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 Infosys: The Challenge of Global Branding Case Study

Information technologies outsourcing is one of the emergent fast-growth industries in the global high-tech economy. India is the leading country for IT outsourcing and Infosys is the largest Indian company in this sector. The branding challenge for Infosys is to leverage its reputation for predictable excellent results for IT outsourcing. Management identified overall company top-line revenue growth as a way to achieve 30%-40% annual increases, but allocated only a negligible budget for marketing communications. The key to the global brand strategy would not be through brand image advertising, but through communications of product strategy developments to large global IT outsourcing companies. The goal for Infosys is to be on the shortlist of providers for the large, most sophisticated for IT services assignments.

Case Authors : Jeff Saperstein, Padmini Murty, Viren Desai

Topic : Sales & Marketing

Related Areas : Competitive strategy, IT, Operations management

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Calculating Net Present Value (NPV) at 6% for Infosys: The Challenge of Global Branding Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014056)	-10014056	-	-
Year 1	3448059	-6565997	3448059	0.9434	3252886
Year 2	3971929	-2594068	7419988	0.89	3535003
Year 3	3942164	1348096	11362152	0.8396	3309917
Year 4	3234425	4582521	14596577	0.7921	2561968
TOTAL			14596577		12659773

The Net Present Value at 6% discount rate is 2645717

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. Profitability Index
3. Internal Rate of Return
4. Payback Period

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

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Formula and Steps to Calculate Net Present Value (NPV) of Infosys: The Challenge of Global Branding

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 Infosys Outsourcing 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 Infosys Outsourcing 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	(10014056)	-10014056	-	-
Year 1	3448059	-6565997	3448059	0.8696	2998312
Year 2	3971929	-2594068	7419988	0.7561	3003349
Year 3	3942164	1348096	11362152	0.6575	2592037
Year 4	3234425	4582521	14596577	0.5718	1849293
TOTAL					10442991

The Net NPV after 4 years is 428935

(10442991 - 10014056 )

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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	(10014056)	-10014056	-	-
Year 1	3448059	-6565997	3448059	0.8333	2873383
Year 2	3971929	-2594068	7419988	0.6944	2758284
Year 3	3942164	1348096	11362152	0.5787	2281345
Year 4	3234425	4582521	14596577	0.4823	1559811
TOTAL					9472823

The Net NPV after 4 years is -541233

At 20% discount rate the NPV is negative (9472823 - 10014056 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Infosys Outsourcing 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 Infosys Outsourcing has a NPV value higher than Zero then finance managers at Infosys Outsourcing 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 Infosys Outsourcing, then the stock price of the Infosys Outsourcing 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 Infosys Outsourcing 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 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.

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 Infosys: The Challenge of Global Branding

References & Further Readings

Jeff Saperstein, Padmini Murty, Viren Desai (2018), "Infosys: The Challenge of Global Branding Harvard Business Review Case Study. Published by HBR Publications.