×




Camposol 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 Camposol case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Camposol case study is a Harvard Business School (HBR) case study written by David E. Bell, Natalie Kindred. The Camposol (referred as “Camposol Camposol's” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Mergers & acquisitions.

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 Camposol Case Study


With $289 million in 2015 revenues, Camposol is a Peruvian grower, exporter, and marketer of fruits and vegetables, with a focus on the high-growth, high-margin blueberry category. Camposol aspires to become Peru's first multinational branded produce company. It already has a strong foothold in the U.S.-an important market where it is refining its branding and retail-customer strategy-and it also seeks to expand in other markets, especially China. To become a leading year-round supplier to retailers, Camposol needs to increase the product volumes it controls, likely through increased sourcing from third parties. At the same time, Camposol has evolved rapidly in recent years and is undergoing the challenges of transforming from family to professional management. This case allows students to consider Camposol's growth, branding, and marketing strategies in light of the challenges and opportunities ahead. It also invites consideration of the opportunity for Peru and other South American growers to exploit counter-seasonal export opportunities, selling into northern-hemisphere markets when prices peak.


Case Authors : David E. Bell, Natalie Kindred

Topic : Sales & Marketing

Related Areas : Mergers & acquisitions




Calculating Net Present Value (NPV) at 6% for Camposol Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10006136) -10006136 - -
Year 1 3457695 -6548441 3457695 0.9434 3261976
Year 2 3973387 -2575054 7431082 0.89 3536300
Year 3 3948658 1373604 11379740 0.8396 3315369
Year 4 3249593 4623197 14629333 0.7921 2573982
TOTAL 14629333 12687628




The Net Present Value at 6% discount rate is 2681492

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. 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 Camposol Camposol's 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. Camposol Camposol's 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 Camposol

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 Camposol Camposol's 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 Camposol Camposol's 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 (10006136) -10006136 - -
Year 1 3457695 -6548441 3457695 0.8696 3006691
Year 2 3973387 -2575054 7431082 0.7561 3004451
Year 3 3948658 1373604 11379740 0.6575 2596307
Year 4 3249593 4623197 14629333 0.5718 1857965
TOTAL 10465415


The Net NPV after 4 years is 459279

(10465415 - 10006136 )








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 (10006136) -10006136 - -
Year 1 3457695 -6548441 3457695 0.8333 2881413
Year 2 3973387 -2575054 7431082 0.6944 2759297
Year 3 3948658 1373604 11379740 0.5787 2285103
Year 4 3249593 4623197 14629333 0.4823 1567126
TOTAL 9492938


The Net NPV after 4 years is -513198

At 20% discount rate the NPV is negative (9492938 - 10006136 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Camposol Camposol's 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 Camposol Camposol's has a NPV value higher than Zero then finance managers at Camposol Camposol's 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 Camposol Camposol's, then the stock price of the Camposol Camposol's 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 Camposol Camposol's 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 key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

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 can impact the cash flow of the project.

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.






Negotiation Strategy of Camposol

References & Further Readings

David E. Bell, Natalie Kindred (2018), "Camposol Harvard Business Review Case Study. Published by HBR Publications.


Cancom SE SWOT Analysis / TOWS Matrix

Technology , Computer Services


CSL SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Daechang Steel SWOT Analysis / TOWS Matrix

Basic Materials , Iron & Steel


PVP Ventures Ltd SWOT Analysis / TOWS Matrix

Services , Real Estate Operations


Lutronic SWOT Analysis / TOWS Matrix

Healthcare , Medical Equipment & Supplies


Ningbo David Medical Device SWOT Analysis / TOWS Matrix

Healthcare , Medical Equipment & Supplies


On Real Intl SWOT Analysis / TOWS Matrix

Technology , Communications Equipment


Nexity SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Zanlakol SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Food Processing


Outin Futures SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Personal & Household Prods.