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Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India 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 Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India case study is a Harvard Business School (HBR) case study written by Piyush Kumar, Geetika Shah. The Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India (referred as “Sewells Dealerships” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Branding, Sales, Supply chain.

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 Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India Case Study


Sewells Group, India, a leading provider of retail solutions to auto original equipment manufacturers (OEMs) and their dealers in the Indian market, developed an innovative engagement model for its clients. The model offered solutions based on the performance management of franchised automotive dealers using measurement, analysis, education and development. The first client for whom Sewells Group developed the dealer sales and service system was a late entrant into the Indian market and had about 100 dealerships across the country. It wanted to ensure that the brand promise communicated through its innovative and expensive marketing campaigns was supported at its dealerships when customers arrived to explore the cars. The client sought a comprehensive model of dealer management that did not suffer from the limitations of traditional models that were heavily focused on training and process compliance. In response, Sewells Group developed a novel 5-step dealer management model that applied principles of retail process efficacy to deliver three key outcomes: customer experience, productivity and profitability across all the departments of a dealership. As Jayesh Jagasia, CEO at Sewells Group, India, reviewed the impressive quarterly results of the model's implementation, he mulled over questions related to the sustainability, replicability and extendibility of this initial model to other firms in the automotive sector. What were the learnings from the first implementation of the model? Was it possible to effectively overcome the challenges that they had faced? Would the model work across the industry? Under what circumstances and for what brands or dealerships would the model work? What sort of consulting resources would the company need? Could some parts of the solution be automated? How would the IT departments of auto manufacturers respond to the automation of solutions?


Case Authors : Piyush Kumar, Geetika Shah

Topic : Sales & Marketing

Related Areas : Branding, Sales, Supply chain




Calculating Net Present Value (NPV) at 6% for Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10013622) -10013622 - -
Year 1 3463663 -6549959 3463663 0.9434 3267607
Year 2 3956921 -2593038 7420584 0.89 3521646
Year 3 3945601 1352563 11366185 0.8396 3312803
Year 4 3242918 4595481 14609103 0.7921 2568695
TOTAL 14609103 12670750


The Net Present Value at 6% discount rate is 2657128

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. 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. Timing of the expected cash flows – stockholders of Sewells Dealerships 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. Sewells Dealerships 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 Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India

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 Sewells Dealerships 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 Sewells Dealerships 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 (10013622) -10013622 - -
Year 1 3463663 -6549959 3463663 0.8696 3011881
Year 2 3956921 -2593038 7420584 0.7561 2992001
Year 3 3945601 1352563 11366185 0.6575 2594297
Year 4 3242918 4595481 14609103 0.5718 1854149
TOTAL 10452327


The Net NPV after 4 years is 438705

(10452327 - 10013622 )






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 (10013622) -10013622 - -
Year 1 3463663 -6549959 3463663 0.8333 2886386
Year 2 3956921 -2593038 7420584 0.6944 2747862
Year 3 3945601 1352563 11366185 0.5787 2283334
Year 4 3242918 4595481 14609103 0.4823 1563907
TOTAL 9481489


The Net NPV after 4 years is -532133

At 20% discount rate the NPV is negative (9481489 - 10013622 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Sewells Dealerships 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 Sewells Dealerships has a NPV value higher than Zero then finance managers at Sewells Dealerships 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 Sewells Dealerships, then the stock price of the Sewells Dealerships 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 Sewells Dealerships 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 can impact the cash flow of the project.

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

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.

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.




References & Further Readings

Piyush Kumar, Geetika Shah (2018), "Sewells Group: Building Sales Process Excellence at Automotive Dealerships in India Harvard Business Review Case Study. Published by HBR Publications.