Doosan Infracore International: Portable Power Brand Transformation (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 Doosan Infracore International: Portable Power Brand Transformation (A) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Doosan Infracore International: Portable Power Brand Transformation (A) case study is a Harvard Business School (HBR) case study written by Dominique Turpin, Martin Roth. The Doosan Infracore International: Portable Power Brand Transformation (A) (referred as “Doosan Branding” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Business models, International business, Mergers & acquisitions.

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 Doosan Infracore International: Portable Power Brand Transformation (A) Case Study

In December 2007, Korean conglomerate Doosan acquired a portfolio of industrial portable power equipment from U.S. company Ingersoll Rand. The acquisitions, the largest ever done by a Korean company outside of Korea, were part of Doosan's strategy to become a global, full-line manufacturer and marketer of construction equipment. With market-leading products under the company's parent brand name throughout Asia, Doosan's senior management expected to re-brand the acquired products using the Doosan name. Stefan Brosick, Director of Global Product Strategy and an Ingersoll Rand veteran, wondered whether Doosan would benefit from an immediate re-branding or if other branding strategies might be more effective. Many key questions needed to be answered before the December 2008 long-range plan presentation: What effect might changing the brand name, built over 135 years, have on these products' market positions? In addition to the name, what other branding elements carried equity in the construction market? How would end users and distributors react to brand changes? How could negative reactions be minimized? And if Brosick proposed a phased brand transformation plan, how could he best position this strategy to senior management? Learning objectives: The case illustrates the strategic role of branding in business-to-business markets, the pressures managers encounter when facing new corporate brand mandates, and analyses needed to formulate and evaluate alternative branding strategies.

Case Authors : Dominique Turpin, Martin Roth

Topic : Sales & Marketing

Related Areas : Business models, International business, Mergers & acquisitions

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Calculating Net Present Value (NPV) at 6% for Doosan Infracore International: Portable Power Brand Transformation (A) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10000145)	-10000145	-	-
Year 1	3462349	-6537796	3462349	0.9434	3266367
Year 2	3955300	-2582496	7417649	0.89	3520203
Year 3	3956058	1373562	11373707	0.8396	3321583
Year 4	3234698	4608260	14608405	0.7921	2562184
TOTAL			14608405		12670336

The Net Present Value at 6% discount rate is 2670191

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Doosan Branding 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 Doosan Branding 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 Doosan Infracore International: Portable Power Brand Transformation (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 Doosan Branding 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 Doosan Branding 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	(10000145)	-10000145	-	-
Year 1	3462349	-6537796	3462349	0.8696	3010738
Year 2	3955300	-2582496	7417649	0.7561	2990775
Year 3	3956058	1373562	11373707	0.6575	2601172
Year 4	3234698	4608260	14608405	0.5718	1849449
TOTAL					10452135

The Net NPV after 4 years is 451990

(10452135 - 10000145 )

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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	(10000145)	-10000145	-	-
Year 1	3462349	-6537796	3462349	0.8333	2885291
Year 2	3955300	-2582496	7417649	0.6944	2746736
Year 3	3956058	1373562	11373707	0.5787	2289385
Year 4	3234698	4608260	14608405	0.4823	1559943
TOTAL					9481355

The Net NPV after 4 years is -518790

At 20% discount rate the NPV is negative (9481355 - 10000145 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Doosan Branding 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 Doosan Branding has a NPV value higher than Zero then finance managers at Doosan Branding 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 Doosan Branding, then the stock price of the Doosan Branding 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 Doosan Branding 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 will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 Doosan Infracore International: Portable Power Brand Transformation (A)

References & Further Readings

Dominique Turpin, Martin Roth (2018), "Doosan Infracore International: Portable Power Brand Transformation (A) Harvard Business Review Case Study. Published by HBR Publications.