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Reversing the AMD Fusion Launch 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 Reversing the AMD Fusion Launch case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Reversing the AMD Fusion Launch case study is a Harvard Business School (HBR) case study written by Elie Ofek, Ryan Johnson. The Reversing the AMD Fusion Launch (referred as “Amd Fusion” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Competition, Disruptive innovation, Financial management, Growth strategy, Market research, Product development, Social responsibility, Strategic planning, Strategy execution.

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 Reversing the AMD Fusion Launch Case Study


AMD management needs to make a critical decision on the launch sequence of its next-generation technology called Fusion. The Fusion processor concept merges the central and graphics processing units (CPU and GPU) onto one chip-- yielding advantages in performance (particularly graphics related), power consumption, and suitability for new computer form factors (tablets, all-in-one machines, etc.). AMD planned to launch Fusion at the beginning of 2011 with a high-end processor, code-named Llano, to impress the industry and consumers with the best the technology could offer (suited for high-end desktops and notebooks), and subsequently to launch low-powered versions, code-named Brazos (suited for small notebooks and netbooks). However, the development of Llano suffered delays while that of Brazos was ahead of schedule. AMD's executive committee raised the possibility of reversing the launch sequence and going with a "Brazos First" strategy. The case describes the microprocessor industry, its main competitors (AMD and Intel), and the evolving world of PC selling and buying. The case further provides a host of market research that AMD conducted to better understand the market. Students need to address the advisability of a reverse launch vs. waiting to launch all versions together and whether AMD can advance its competitive position relative to Intel with Fusion. Students need to outline their marketing approach (sales effort, pricing, consumer marketing, etc.) in the event that a reverse launch strategy is pursued. As part of the analysis, students need to take into account AMD's recent shift in branding approach: from giving a separate brand name to each new microprocessor to a tiered branding approach that would stay constant even in the face of new launches. The case allows for a deep examination of how a follower that faces a dominant industry player can use technology and marketing to compete effectively. It further poses the question of how firms should modify their branding strategy in light of perceived shifts in consumer behavior.


Case Authors : Elie Ofek, Ryan Johnson

Topic : Sales & Marketing

Related Areas : Competition, Disruptive innovation, Financial management, Growth strategy, Market research, Product development, Social responsibility, Strategic planning, Strategy execution




Calculating Net Present Value (NPV) at 6% for Reversing the AMD Fusion Launch Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10028080) -10028080 - -
Year 1 3465749 -6562331 3465749 0.9434 3269575
Year 2 3956615 -2605716 7422364 0.89 3521373
Year 3 3938323 1332607 11360687 0.8396 3306692
Year 4 3234372 4566979 14595059 0.7921 2561926
TOTAL 14595059 12659565




The Net Present Value at 6% discount rate is 2631485

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. Internal Rate of Return
2. Net Present Value
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. Amd Fusion 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 Amd Fusion have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Reversing the AMD Fusion Launch

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 Amd Fusion 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 Amd Fusion 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 (10028080) -10028080 - -
Year 1 3465749 -6562331 3465749 0.8696 3013695
Year 2 3956615 -2605716 7422364 0.7561 2991769
Year 3 3938323 1332607 11360687 0.6575 2589511
Year 4 3234372 4566979 14595059 0.5718 1849263
TOTAL 10444238


The Net NPV after 4 years is 416158

(10444238 - 10028080 )








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 (10028080) -10028080 - -
Year 1 3465749 -6562331 3465749 0.8333 2888124
Year 2 3956615 -2605716 7422364 0.6944 2747649
Year 3 3938323 1332607 11360687 0.5787 2279122
Year 4 3234372 4566979 14595059 0.4823 1559786
TOTAL 9474681


The Net NPV after 4 years is -553399

At 20% discount rate the NPV is negative (9474681 - 10028080 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Amd Fusion 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 Amd Fusion has a NPV value higher than Zero then finance managers at Amd Fusion 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 Amd Fusion, then the stock price of the Amd Fusion 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 Amd Fusion 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 –

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

What can impact the cash flow of the project.

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 Reversing the AMD Fusion Launch

References & Further Readings

Elie Ofek, Ryan Johnson (2018), "Reversing the AMD Fusion Launch Harvard Business Review Case Study. Published by HBR Publications.


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