Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context) 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 Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context) case study is a Harvard Business School (HBR) case study written by S. Ramesh Kumar, Shilpa S., Krishna G. Kumar. The Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context) (referred as “Tanishq Raga” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Emerging markets.

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 Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context) Case Study

Abstract (Maximum of 2,000 Characters): Briefly describes content of case. There is an emergence of a new segment in the Indian context - Young women in urban India, who are educated, independent, driven towards professional goals adopting a modern lifestyle, even while retaining their ethnic cultural values. This segment is enthusiastic about using brands whose symbolic meanings are aligned with their self-concepts, as it would enhance their very unique self-expression. Raga was the first ever watch brand in the world that was exclusively launched for women, by Titan Industries Limited. Raga was positioned as an ethnic watch for the sophisticated Indian woman, embellished with striking symbolism from the culture of India. Beauty, Sensuality and Feminity were the core values of Raga that were reflected in the brand's positioning .Tanishq was another pioneering brand from the same company that entered as a branded player in a context where the Indian jewelry market was highly unorganized. Tanishq offered professional work-wear jewelry as well as traditional jewellery that women wore for Indian rituals, capturing the evolving women who wore professional as well as traditional jewelry based on the context. Women associated appropriate as well as beautiful looks with Tanishq jewelry. The case explores if the application of psychographics to brands could be taken to the next level - how can a company with similar symbolic brands (Raga watches and Tanishq jewelry) in different categories appeal to the target segment that may have a similar psychographic profile. Some of these challenges include - Should similar appeals be sustained and strengthened? Would such an appeal be favorable to both the brands? Should the positioning of either brand be modified? How do the appeals impact the formation of groups (reference groups) involved with these brands? Can behavioral theories be useful for such challenges of synergizing the appeals of Raga and Tanishq?

Case Authors : S. Ramesh Kumar, Shilpa S., Krishna G. Kumar

Topic : Sales & Marketing

Related Areas : Emerging markets

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Calculating Net Present Value (NPV) at 6% for Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10002790)	-10002790	-	-
Year 1	3470368	-6532422	3470368	0.9434	3273932
Year 2	3976406	-2556016	7446774	0.89	3538987
Year 3	3946757	1390741	11393531	0.8396	3313773
Year 4	3230360	4621101	14623891	0.7921	2558748
TOTAL			14623891		12685440

The Net Present Value at 6% discount rate is 2682650

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. Tanishq Raga 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 Tanishq Raga 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 Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context)

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 Tanishq Raga 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 Tanishq Raga 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	(10002790)	-10002790	-	-
Year 1	3470368	-6532422	3470368	0.8696	3017711
Year 2	3976406	-2556016	7446774	0.7561	3006734
Year 3	3946757	1390741	11393531	0.6575	2595057
Year 4	3230360	4621101	14623891	0.5718	1846969
TOTAL					10466471

The Net NPV after 4 years is 463681

(10466471 - 10002790 )

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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	(10002790)	-10002790	-	-
Year 1	3470368	-6532422	3470368	0.8333	2891973
Year 2	3976406	-2556016	7446774	0.6944	2761393
Year 3	3946757	1390741	11393531	0.5787	2284003
Year 4	3230360	4621101	14623891	0.4823	1557851
TOTAL					9495220

The Net NPV after 4 years is -507570

At 20% discount rate the NPV is negative (9495220 - 10002790 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Tanishq Raga 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 Tanishq Raga has a NPV value higher than Zero then finance managers at Tanishq Raga 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 Tanishq Raga, then the stock price of the Tanishq Raga 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 Tanishq Raga 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 will be a multi year spillover effect of various taxation regulations.

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 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 Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context)

References & Further Readings

S. Ramesh Kumar, Shilpa S., Krishna G. Kumar (2018), "Raga and Tanishq - Symbolic Linkages between Brands (The Indian Context) Harvard Business Review Case Study. Published by HBR Publications.