Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste 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 Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste case study is a Harvard Business School (HBR) case study written by John A. Quelch, Margaret Rodriguez. The Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste (referred as “Cavity Toothpaste” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Product development, Social responsibility, Sustainability.

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 Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste Case Study

In October 2013, Colgate-Palmolive Company, the world's leading oral care company, was about to launch its new ColgateA? Maximum Cavity Protectiona?? plus Sugar Acid Neutralizera?? toothpaste in Brazil. Oral care category accounted for 46 percent of Colgate's $17.4 billion sales worldwide in 2013. The new toothpaste was clinically proven to reduce and prevent cavities more effectively than toothpaste with the same level of fluoride alone. All major industry players, including Procter & Gamble, GlaxoSmithKline and Colgate itself, had long ago launched products with the maximum amount of fluoride allowed by Health authorities. Yet cavities remained a significant threat to public health in many countries, both developing and developed. As Suzan Harrison, Colgate's president of Oral Care, prepared to launch CMCP+SAN in Brazil, the world's third largest oral care market, her executive team was divided over the product's positioning and pricing. Should it be positioned as a basic product to maximize reach for its health benefits or as a premium product for consumers who sought superior cavity protection?

Case Authors : John A. Quelch, Margaret Rodriguez

Topic : Sales & Marketing

Related Areas : Product development, Social responsibility, Sustainability

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Calculating Net Present Value (NPV) at 6% for Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10024376)	-10024376	-	-
Year 1	3460720	-6563656	3460720	0.9434	3264830
Year 2	3963118	-2600538	7423838	0.89	3527161
Year 3	3954779	1354241	11378617	0.8396	3320509
Year 4	3249517	4603758	14628134	0.7921	2573922
TOTAL			14628134		12686422

The Net Present Value at 6% discount rate is 2662046

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. Profitability Index
3. Internal Rate of Return
4. Net Present Value

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. Cavity Toothpaste 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 Cavity Toothpaste 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 Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste

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 Cavity Toothpaste 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 Cavity Toothpaste 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	(10024376)	-10024376	-	-
Year 1	3460720	-6563656	3460720	0.8696	3009322
Year 2	3963118	-2600538	7423838	0.7561	2996687
Year 3	3954779	1354241	11378617	0.6575	2600331
Year 4	3249517	4603758	14628134	0.5718	1857922
TOTAL					10464262

The Net NPV after 4 years is 439886

(10464262 - 10024376 )

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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	(10024376)	-10024376	-	-
Year 1	3460720	-6563656	3460720	0.8333	2883933
Year 2	3963118	-2600538	7423838	0.6944	2752165
Year 3	3954779	1354241	11378617	0.5787	2288645
Year 4	3249517	4603758	14628134	0.4823	1567090
TOTAL					9491833

The Net NPV after 4 years is -532543

At 20% discount rate the NPV is negative (9491833 - 10024376 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Cavity Toothpaste 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 Cavity Toothpaste has a NPV value higher than Zero then finance managers at Cavity Toothpaste 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 Cavity Toothpaste, then the stock price of the Cavity Toothpaste 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 Cavity Toothpaste 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 –

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.

What can impact the cash flow of 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.

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

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 Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste

References & Further Readings

John A. Quelch, Margaret Rodriguez (2018), "Colgate-Palmolive Company: Marketing Anti-Cavity Toothpaste Harvard Business Review Case Study. Published by HBR Publications.