Adelphia Communications Corp.'s Bankruptcy, Spanish Version 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 Adelphia Communications Corp.'s Bankruptcy, Spanish Version case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Adelphia Communications Corp.'s Bankruptcy, Spanish Version case study is a Harvard Business School (HBR) case study written by Stuart C. Gilson, Belen Villalonga. The Adelphia Communications Corp.'s Bankruptcy, Spanish Version (referred as “Adelphia Cablevision” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Ethics, Financial management, Reorganization.

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 Adelphia Communications Corp.'s Bankruptcy, Spanish Version Case Study

In 2002, a massive accounting fraud and corporate looting scandal involving the founding Rigas family made Adelphia the 11th largest bankruptcy case in history, and the third--after WorldCom and Enron--among those triggered by fraud. Set in 2005, when Adelphia is contemplating several options to emerge from bankruptcy, including a $17.6 billion cash-and-stock offer from Time Warner and Comcast, a $17.1 billion cash-only offer from Cablevision, and a $15 billion cash-only offer from KKR and Providence. The fact that both Comcast and Cablevision are themselves family-controlled and with a large wedge between the family's ownership and control rights further complicates the decision.

Case Authors : Stuart C. Gilson, Belen Villalonga

Topic : Finance & Accounting

Related Areas : Ethics, Financial management, Reorganization

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Calculating Net Present Value (NPV) at 6% for Adelphia Communications Corp.'s Bankruptcy, Spanish Version Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018718)	-10018718	-	-
Year 1	3460293	-6558425	3460293	0.9434	3264427
Year 2	3959665	-2598760	7419958	0.89	3524088
Year 3	3974638	1375878	11394596	0.8396	3337183
Year 4	3223969	4599847	14618565	0.7921	2553685
TOTAL			14618565		12679383

The Net Present Value at 6% discount rate is 2660665

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. Payback Period
2. Net Present Value
3. Profitability Index
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Adelphia Cablevision 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 Adelphia Cablevision have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Adelphia Communications Corp.'s Bankruptcy, Spanish Version

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 Finance & Accounting 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 Adelphia Cablevision 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 Adelphia Cablevision 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	(10018718)	-10018718	-	-
Year 1	3460293	-6558425	3460293	0.8696	3008950
Year 2	3959665	-2598760	7419958	0.7561	2994076
Year 3	3974638	1375878	11394596	0.6575	2613389
Year 4	3223969	4599847	14618565	0.5718	1843315
TOTAL					10459730

The Net NPV after 4 years is 441012

(10459730 - 10018718 )

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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	(10018718)	-10018718	-	-
Year 1	3460293	-6558425	3460293	0.8333	2883578
Year 2	3959665	-2598760	7419958	0.6944	2749767
Year 3	3974638	1375878	11394596	0.5787	2300138
Year 4	3223969	4599847	14618565	0.4823	1554769
TOTAL					9488252

The Net NPV after 4 years is -530466

At 20% discount rate the NPV is negative (9488252 - 10018718 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Adelphia Cablevision 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 Adelphia Cablevision has a NPV value higher than Zero then finance managers at Adelphia Cablevision 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 Adelphia Cablevision, then the stock price of the Adelphia Cablevision 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 Adelphia Cablevision 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 will be a multi year spillover effect of various taxation regulations.

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.

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 Adelphia Communications Corp.'s Bankruptcy, Spanish Version

References & Further Readings

Stuart C. Gilson, Belen Villalonga (2018), "Adelphia Communications Corp.'s Bankruptcy, Spanish Version Harvard Business Review Case Study. Published by HBR Publications.