NASCAR: Leading a Marketing Transformation in a Time of Crisis 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 NASCAR: Leading a Marketing Transformation in a Time of Crisis case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. NASCAR: Leading a Marketing Transformation in a Time of Crisis case study is a Harvard Business School (HBR) case study written by Eric T. Anderson, Vasilia Kilibarda. The NASCAR: Leading a Marketing Transformation in a Time of Crisis (referred as “Nascar Brian” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Leadership, Market research, Social platforms, 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

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Case Description of NASCAR: Leading a Marketing Transformation in a Time of Crisis Case Study

It is February 2011 and Brian France, CEO of NASCAR (the National Association for Stock Car Auto Racing), is facing a crisis. In the last five years, attendance at weekend NASCAR races has fallen 22 percent and television viewership has declined 30 percent. Key marketing sponsors have recently left the sport. At the same time, the U.S. economy has only begun to recover from an economic recession that has had an adverse impact on the sport of auto racing as a whole. Some leaders within NASCAR counseled Brian that these trends in attendance, viewership, and sponsorship stemmed from the recession and that NASCAR should continue with business as usual. But Brian sensed that the industry needed fundamental change and that he, as CEO of NASCAR, was the one that must lead this change. With Brian at the helm, NASCAR embarked on an unprecedented amount of qualitative and quantitative research to assess the strengths and weaknesses of the entire industry. At the center of this research was the NASCAR consumer. Highly engaged, enthusiastic consumers were at the heart of an industry business model that had been successful for decades. But in 2011, marketing within all of NASCAR needed to transform, as it was clear that consumers were disengaging with the sport. As the consumer research results unfold, Brian and leaders within NASCAR must make tough choices and set priorities. The case focuses on four key areas in which decisions need to be made by NASCAR leadership: digital marketing and social media, targeting the next-generation NASCAR consumer, enhancing the star power of NASCAR drivers, and enhancing the consumer experience at NASCAR events. Focus group videos offer students a customer-centric deep-dive into these challenges. At its heart, this is a case about great leadership and transforming marketing throughout an entire industry. A wrap-up video from CEO Brian France summarizes how NASCAR executives tackled the difficult questions posed in the case.

Case Authors : Eric T. Anderson, Vasilia Kilibarda

Topic : Sales & Marketing

Related Areas : Leadership, Market research, Social platforms, Strategic planning

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Calculating Net Present Value (NPV) at 6% for NASCAR: Leading a Marketing Transformation in a Time of Crisis Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10012630)	-10012630	-	-
Year 1	3463463	-6549167	3463463	0.9434	3267418
Year 2	3960094	-2589073	7423557	0.89	3524470
Year 3	3966261	1377188	11389818	0.8396	3330149
Year 4	3240528	4617716	14630346	0.7921	2566802
TOTAL			14630346		12688838

The Net Present Value at 6% discount rate is 2676208

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 Nascar Brian 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. Nascar Brian 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 NASCAR: Leading a Marketing Transformation in a Time of Crisis

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 Nascar Brian 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 Nascar Brian 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	(10012630)	-10012630	-	-
Year 1	3463463	-6549167	3463463	0.8696	3011707
Year 2	3960094	-2589073	7423557	0.7561	2994400
Year 3	3966261	1377188	11389818	0.6575	2607881
Year 4	3240528	4617716	14630346	0.5718	1852782
TOTAL					10466770

The Net NPV after 4 years is 454140

(10466770 - 10012630 )

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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	(10012630)	-10012630	-	-
Year 1	3463463	-6549167	3463463	0.8333	2886219
Year 2	3960094	-2589073	7423557	0.6944	2750065
Year 3	3966261	1377188	11389818	0.5787	2295290
Year 4	3240528	4617716	14630346	0.4823	1562755
TOTAL					9494329

The Net NPV after 4 years is -518301

At 20% discount rate the NPV is negative (9494329 - 10012630 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nascar Brian 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 Nascar Brian has a NPV value higher than Zero then finance managers at Nascar Brian 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 Nascar Brian, then the stock price of the Nascar Brian 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 Nascar Brian 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.

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.

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 NASCAR: Leading a Marketing Transformation in a Time of Crisis

References & Further Readings

Eric T. Anderson, Vasilia Kilibarda (2018), "NASCAR: Leading a Marketing Transformation in a Time of Crisis Harvard Business Review Case Study. Published by HBR Publications.