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Singapore Airlines: Premium Goes Multi-Brand 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 Singapore Airlines: Premium Goes Multi-Brand case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Singapore Airlines: Premium Goes Multi-Brand case study is a Harvard Business School (HBR) case study written by Rohit Deshpande, Dawn Lau. The Singapore Airlines: Premium Goes Multi-Brand (referred as “Airlines Carriers” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customers, Leading teams.

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 Singapore Airlines: Premium Goes Multi-Brand Case Study


Singapore Airlines had long been considered the gold standard for its innovative customer service. However, the company was faced with new sources of competition, from the rapid growth of Southeast Asian low-cost carriers on the one hand, to the expansion of premium Gulf carriers on the other. The company therefore decided to launch a low-cost airline of its own called Scoot, the fourth brand in its portfolio. Now CEO Goh Choon Phong must consider how to grow all four airlines without cannibalizing its own market share or diluting the sterling brand of the parent airline.


Case Authors : Rohit Deshpande, Dawn Lau

Topic : Sales & Marketing

Related Areas : Customers, Leading teams




Calculating Net Present Value (NPV) at 6% for Singapore Airlines: Premium Goes Multi-Brand Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10011935) -10011935 - -
Year 1 3466569 -6545366 3466569 0.9434 3270348
Year 2 3979301 -2566065 7445870 0.89 3541564
Year 3 3966847 1400782 11412717 0.8396 3330641
Year 4 3235183 4635965 14647900 0.7921 2562568
TOTAL 14647900 12705121


The Net Present Value at 6% discount rate is 2693186

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. Profitability Index
2. Net Present Value
3. Payback Period
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 Airlines Carriers 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. Airlines Carriers 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 Singapore Airlines: Premium Goes Multi-Brand

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 Airlines Carriers 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 Airlines Carriers 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 (10011935) -10011935 - -
Year 1 3466569 -6545366 3466569 0.8696 3014408
Year 2 3979301 -2566065 7445870 0.7561 3008923
Year 3 3966847 1400782 11412717 0.6575 2608266
Year 4 3235183 4635965 14647900 0.5718 1849726
TOTAL 10481324


The Net NPV after 4 years is 469389

(10481324 - 10011935 )






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 (10011935) -10011935 - -
Year 1 3466569 -6545366 3466569 0.8333 2888808
Year 2 3979301 -2566065 7445870 0.6944 2763403
Year 3 3966847 1400782 11412717 0.5787 2295629
Year 4 3235183 4635965 14647900 0.4823 1560177
TOTAL 9508017


The Net NPV after 4 years is -503918

At 20% discount rate the NPV is negative (9508017 - 10011935 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Airlines Carriers 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 Airlines Carriers has a NPV value higher than Zero then finance managers at Airlines Carriers 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 Airlines Carriers, then the stock price of the Airlines Carriers 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 Airlines Carriers 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.

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 can impact the cash flow of 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.




References & Further Readings

Rohit Deshpande, Dawn Lau (2018), "Singapore Airlines: Premium Goes Multi-Brand Harvard Business Review Case Study. Published by HBR Publications.