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Banking on Social Media (A) 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 Banking on Social Media (A) case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Banking on Social Media (A) case study is a Harvard Business School (HBR) case study written by Luisa Mazinter, Nicola Kleyn, Michael Goldman, Jennifer Lindsey-Renton. The Banking on Social Media (A) (referred as “Fnb Fnb'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, Motivating people, Social platforms.

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 Banking on Social Media (A) Case Study


First National Bank (FNB), one of South Africa's "Big Four" banks, has, under the stewardship of its CEO, invested in a strategy of innovation to grow its market presence in South Africa, other emerging-market African countries, and India. In line with its strategy to lead digital banking in South Africa, FNB has invested in building a social media strategy to enable the brand to strengthen its relationships with customers, through building customer knowledge and stickiness and humanizing its brand.In 2012, FNB's head of digital marketing and media sees a tweet from Standard Bank stating that it has instructed its attorneys to lodge a complaint against what it alleges to be FNB's misleading advertising. She wonders whether Standard Bank's use of Twitter to communicate this competitive action is related to FNB's extensive and well-publicized use of the micro-blogging service. She knows that the debate on Twitter will be a significant indicator of whether her social media strategy has been successful. How can FNB continue to differentiate itself and alleviate the pressure on non-interest revenues? Luisa Mazinter is affiliated affiliated with Univ of Pretoria - GIBS. Nicola Kleyn is affiliated with University of Pretoria. Michael Goldman is affiliated with University of San Francisco.


Case Authors : Luisa Mazinter, Nicola Kleyn, Michael Goldman, Jennifer Lindsey-Renton

Topic : Sales & Marketing

Related Areas : Motivating people, Social platforms




Calculating Net Present Value (NPV) at 6% for Banking on Social Media (A) Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10016594) -10016594 - -
Year 1 3471374 -6545220 3471374 0.9434 3274881
Year 2 3963608 -2581612 7434982 0.89 3527597
Year 3 3969705 1388093 11404687 0.8396 3333041
Year 4 3223269 4611362 14627956 0.7921 2553131
TOTAL 14627956 12688650




The Net Present Value at 6% discount rate is 2672056

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. Payback Period
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 Fnb Fnb'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. Fnb Fnb'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 Banking on Social Media (A)

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 Fnb Fnb'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 Fnb Fnb'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 (10016594) -10016594 - -
Year 1 3471374 -6545220 3471374 0.8696 3018586
Year 2 3963608 -2581612 7434982 0.7561 2997057
Year 3 3969705 1388093 11404687 0.6575 2610145
Year 4 3223269 4611362 14627956 0.5718 1842915
TOTAL 10468703


The Net NPV after 4 years is 452109

(10468703 - 10016594 )








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 (10016594) -10016594 - -
Year 1 3471374 -6545220 3471374 0.8333 2892812
Year 2 3963608 -2581612 7434982 0.6944 2752506
Year 3 3969705 1388093 11404687 0.5787 2297283
Year 4 3223269 4611362 14627956 0.4823 1554431
TOTAL 9497032


The Net NPV after 4 years is -519562

At 20% discount rate the NPV is negative (9497032 - 10016594 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Fnb Fnb'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 Fnb Fnb's has a NPV value higher than Zero then finance managers at Fnb Fnb'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 Fnb Fnb's, then the stock price of the Fnb Fnb'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 Fnb Fnb'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 can impact the cash flow of 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 will be a multi year spillover effect of various taxation regulations.

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.

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 Banking on Social Media (A)

References & Further Readings

Luisa Mazinter, Nicola Kleyn, Michael Goldman, Jennifer Lindsey-Renton (2018), "Banking on Social Media (A) Harvard Business Review Case Study. Published by HBR Publications.


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