Malaysia Airlines: The Marketing Challenge after MH370 and MH17 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 Malaysia Airlines: The Marketing Challenge after MH370 and MH17 case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Malaysia Airlines: The Marketing Challenge after MH370 and MH17 case study is a Harvard Business School (HBR) case study written by Neeraj Pandey, Gaganpreet Singh. The Malaysia Airlines: The Marketing Challenge after MH370 and MH17 (referred as “Mas Malaysia” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Crisis management, Customers, Organizational culture.

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 Malaysia Airlines: The Marketing Challenge after MH370 and MH17 Case Study

The chief executive officer of Malaysia Airlines (MAS) had the daunting task of sustaining a business that had suffered the tragic loss of two of its airliners in a span of just four months. Prior to this, a US$392 million loss, as well as the inability to compete with lower-cost carriers, had posed a great challenge to MAS. Management was planning to initiate a cost-cutting strategy to manage pricing and the competitive challenges of the aviation industry when these incidents shocked the world. The disasters greatly impacted customer confidence, as reflected in the company's declining booking rates and stock prices. With its reputation severely damaged, MAS was faced with many hard-hitting questions from various stakeholders about the airline's prospects. Many felt there was a need to transform the entire business model. The top executives pondered various options, including a rebrand of the airline, a new discounted pricing structure to build volume, a private equity infusion, a merger and filing for bankruptcy. Each option would have to be considered very carefully, as the changes made to the business would decide the future of MAS. Neeraj Pandey and Gaganpreet Singh are affiliated with National Institute of Industrial Engineering (NITIE).

Case Authors : Neeraj Pandey, Gaganpreet Singh

Topic : Sales & Marketing

Related Areas : Crisis management, Customers, Organizational culture

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Calculating Net Present Value (NPV) at 6% for Malaysia Airlines: The Marketing Challenge after MH370 and MH17 Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10001758)	-10001758	-	-
Year 1	3456939	-6544819	3456939	0.9434	3261263
Year 2	3966104	-2578715	7423043	0.89	3529818
Year 3	3952936	1374221	11375979	0.8396	3318961
Year 4	3227269	4601490	14603248	0.7921	2556299
TOTAL			14603248		12666342

The Net Present Value at 6% discount rate is 2664584

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. Internal Rate of Return
2. Profitability Index
3. Payback Period
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 Mas Malaysia 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. Mas Malaysia shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Malaysia Airlines: The Marketing Challenge after MH370 and MH17

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 Mas Malaysia 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 Mas Malaysia 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	(10001758)	-10001758	-	-
Year 1	3456939	-6544819	3456939	0.8696	3006034
Year 2	3966104	-2578715	7423043	0.7561	2998944
Year 3	3952936	1374221	11375979	0.6575	2599120
Year 4	3227269	4601490	14603248	0.5718	1845202
TOTAL					10449299

The Net NPV after 4 years is 447541

(10449299 - 10001758 )

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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	(10001758)	-10001758	-	-
Year 1	3456939	-6544819	3456939	0.8333	2880783
Year 2	3966104	-2578715	7423043	0.6944	2754239
Year 3	3952936	1374221	11375979	0.5787	2287579
Year 4	3227269	4601490	14603248	0.4823	1556360
TOTAL					9478961

The Net NPV after 4 years is -522797

At 20% discount rate the NPV is negative (9478961 - 10001758 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mas Malaysia 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 Mas Malaysia has a NPV value higher than Zero then finance managers at Mas Malaysia 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 Mas Malaysia, then the stock price of the Mas Malaysia 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 Mas Malaysia 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 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 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.

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.

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Negotiation Strategy of Malaysia Airlines: The Marketing Challenge after MH370 and MH17

References & Further Readings

Neeraj Pandey, Gaganpreet Singh (2018), "Malaysia Airlines: The Marketing Challenge after MH370 and MH17 Harvard Business Review Case Study. Published by HBR Publications.