ASICS: Chasing a 2020 Vision 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 ASICS: Chasing a 2020 Vision case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. ASICS: Chasing a 2020 Vision case study is a Harvard Business School (HBR) case study written by Elie Ofek, Nobuo Sato, Akiko Kanno. The ASICS: Chasing a 2020 Vision (referred as “Asics Oyama” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Change management, Competition, IT.

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 ASICS: Chasing a 2020 Vision Case Study

In early 2016, Motoi Oyama, president and CEO of ASICS, a major sports apparel and footwear manufacturer based in Japan, lays out his company's growth plan for the upcoming 5 years. The new plan set ambitious goals in terms of revenue and profit increases. At the heart of the strategy to achieve these goals are a desire to embrace a more direct to consumer mindset, expand into new customer segments, and communicate a more consistent and emotional brand worldwide. With its primary core customer currently the "serious" runner and its innovation strategy geared towards high-end performance, pursuing these objectives in light of the fierce competitive landscape posed a multitude of challenges. Moreover, the company had recently launched several lifestyle brands (using brand names it had revived), which posed brand architecture issues. Lastly, the company had just acquired a digital fitness app, RunKeeper, and was wondering how best to leverage this asset and how it fit with the main pillars of the growth plan strategy. The Tokyo 2020 Olympic Games would coincide with the conclusion of the 5 year plan, and ASICS had paid over $100 million to be a Gold Sponsor of the games- Oyama wondered whether his company was on the right track to achieving the goals he intimated to shareholders.

Case Authors : Elie Ofek, Nobuo Sato, Akiko Kanno

Topic : Sales & Marketing

Related Areas : Change management, Competition, IT

---

Calculating Net Present Value (NPV) at 6% for ASICS: Chasing a 2020 Vision Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10025887)	-10025887	-	-
Year 1	3461381	-6564506	3461381	0.9434	3265454
Year 2	3956812	-2607694	7418193	0.89	3521549
Year 3	3957800	1350106	11375993	0.8396	3323045
Year 4	3230236	4580342	14606229	0.7921	2558649
TOTAL			14606229		12668697

The Net Present Value at 6% discount rate is 2642810

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. Internal Rate of Return
3. Net Present Value
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 Asics Oyama 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. Asics Oyama 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 ASICS: Chasing a 2020 Vision

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 Asics Oyama 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 Asics Oyama 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	(10025887)	-10025887	-	-
Year 1	3461381	-6564506	3461381	0.8696	3009897
Year 2	3956812	-2607694	7418193	0.7561	2991918
Year 3	3957800	1350106	11375993	0.6575	2602318
Year 4	3230236	4580342	14606229	0.5718	1846898
TOTAL					10451031

The Net NPV after 4 years is 425144

(10451031 - 10025887 )

---

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	(10025887)	-10025887	-	-
Year 1	3461381	-6564506	3461381	0.8333	2884484
Year 2	3956812	-2607694	7418193	0.6944	2747786
Year 3	3957800	1350106	11375993	0.5787	2290394
Year 4	3230236	4580342	14606229	0.4823	1557791
TOTAL					9480455

The Net NPV after 4 years is -545432

At 20% discount rate the NPV is negative (9480455 - 10025887 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Asics Oyama 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 Asics Oyama has a NPV value higher than Zero then finance managers at Asics Oyama 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 Asics Oyama, then the stock price of the Asics Oyama 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 Asics Oyama 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.

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

What can impact the cash flow of the project.

Understanding of risks involved in 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.

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 ASICS: Chasing a 2020 Vision

References & Further Readings

Elie Ofek, Nobuo Sato, Akiko Kanno (2018), "ASICS: Chasing a 2020 Vision Harvard Business Review Case Study. Published by HBR Publications.