Reinventing Officer's Choice Whisky: Spoiled for Choice 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 Reinventing Officer's Choice Whisky: Spoiled for Choice case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Reinventing Officer's Choice Whisky: Spoiled for Choice case study is a Harvard Business School (HBR) case study written by Tanuka Ghoshal, Geetika Shah, Arun Pereira. The Reinventing Officer's Choice Whisky: Spoiled for Choice (referred as “Reinvention Officer'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, Market research.

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 Reinventing Officer's Choice Whisky: Spoiled for Choice Case Study

This case is designed to highlight the vital role of promotion, the fourth "P" of the marketing mix, in a brand reinvention exercise. Using the context of the brand reinvention journey of Officer's Choice Whisky (OCW), the case highlights the importance and need for syncing brand objectives and communication objectives so as to build brand relevance in a competitive environment, increase revenue and enhance customer loyalty. The case also highlights the importance of systematic market research in identifying brand weaknesses and providing direction for effective marketing communications.Ahmed Rahimtoola, Head of Marketing at Allied Blenders and Distillers (ABD), was leading the process of conducting an extensive brand reinvention exercise for Officer's Choice. Market research had established the need for brand reinvention, indicating that Officer's Choice had to overcome the challenges of low brand salience, lack of emotional connect with customers, and outdated brand communication. Accordingly, the best advertising agencies in India were invited to come up with creatives that would answer the following question: How should Officer's Choice reposition and repackage itself and reconnect with consumers? ABD had the tough task of choosing the creative that held the magic recipe that would strategically weave brand objectives and communication objectives to yield optimal benefits. In discussing the firm's creative options, the case brings to light the crucial aspects of a brand reinvention process, the role of communication objectives in brand reinvention, and the mechanics of a successful marriage of marketing communication and brand strategy objectives.

Case Authors : Tanuka Ghoshal, Geetika Shah, Arun Pereira

Topic : Sales & Marketing

Related Areas : Market research

---

Calculating Net Present Value (NPV) at 6% for Reinventing Officer's Choice Whisky: Spoiled for Choice Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020743)	-10020743	-	-
Year 1	3454424	-6566319	3454424	0.9434	3258891
Year 2	3953685	-2612634	7408109	0.89	3518766
Year 3	3956923	1344289	11365032	0.8396	3322309
Year 4	3236373	4580662	14601405	0.7921	2563511
TOTAL			14601405		12663476

The Net Present Value at 6% discount rate is 2642733

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 Reinvention Officer'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. Reinvention Officer'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 Reinventing Officer's Choice Whisky: Spoiled for Choice

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 Reinvention Officer'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 Reinvention Officer'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	(10020743)	-10020743	-	-
Year 1	3454424	-6566319	3454424	0.8696	3003847
Year 2	3953685	-2612634	7408109	0.7561	2989554
Year 3	3956923	1344289	11365032	0.6575	2601741
Year 4	3236373	4580662	14601405	0.5718	1850407
TOTAL					10445549

The Net NPV after 4 years is 424806

(10445549 - 10020743 )

---

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	(10020743)	-10020743	-	-
Year 1	3454424	-6566319	3454424	0.8333	2878687
Year 2	3953685	-2612634	7408109	0.6944	2745615
Year 3	3956923	1344289	11365032	0.5787	2289886
Year 4	3236373	4580662	14601405	0.4823	1560751
TOTAL					9474938

The Net NPV after 4 years is -545805

At 20% discount rate the NPV is negative (9474938 - 10020743 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Reinvention Officer'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 Reinvention Officer's has a NPV value higher than Zero then finance managers at Reinvention Officer'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 Reinvention Officer's, then the stock price of the Reinvention Officer'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 Reinvention Officer'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.

Understanding of risks involved in the project.

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.

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 Reinventing Officer's Choice Whisky: Spoiled for Choice

References & Further Readings

Tanuka Ghoshal, Geetika Shah, Arun Pereira (2018), "Reinventing Officer's Choice Whisky: Spoiled for Choice Harvard Business Review Case Study. Published by HBR Publications.