×




Mary Kay Inc.: Asian Market Entry (B) 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 Mary Kay Inc.: Asian Market Entry (B) case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Mary Kay Inc.: Asian Market Entry (B) case study is a Harvard Business School (HBR) case study written by John A. Quelch. The Mary Kay Inc.: Asian Market Entry (B) (referred as “Kay Mary” 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, Growth strategy.

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 Mary Kay Inc.: Asian Market Entry (B) Case Study


By 2008, over half of Mary Kay Cosmetics' $2.8 billion sales were from outside the USA. Sales from China exceeded $500 million in 2008 through over 450,000 beauty consultants. China was Mary Kay Cosmetics' second most important national market with revenues growing at over 20 percent each year. In contrast, Mary Kay Cosmetics had decided to exit the Japanese market in 2001.


Case Authors : John A. Quelch

Topic : Sales & Marketing

Related Areas : Emerging markets, Growth strategy




Calculating Net Present Value (NPV) at 6% for Mary Kay Inc.: Asian Market Entry (B) Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10005472) -10005472 - -
Year 1 3450493 -6554979 3450493 0.9434 3255182
Year 2 3961662 -2593317 7412155 0.89 3525865
Year 3 3947590 1354273 11359745 0.8396 3314473
Year 4 3249949 4604222 14609694 0.7921 2574264
TOTAL 14609694 12669784




The Net Present Value at 6% discount rate is 2664312

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. Net Present Value
2. Payback Period
3. Internal Rate of Return
4. Profitability Index

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. Kay Mary 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 Kay Mary have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Mary Kay Inc.: Asian Market Entry (B)

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 Kay Mary 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 Kay Mary 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 (10005472) -10005472 - -
Year 1 3450493 -6554979 3450493 0.8696 3000429
Year 2 3961662 -2593317 7412155 0.7561 2995586
Year 3 3947590 1354273 11359745 0.6575 2595605
Year 4 3249949 4604222 14609694 0.5718 1858169
TOTAL 10449788


The Net NPV after 4 years is 444316

(10449788 - 10005472 )








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 (10005472) -10005472 - -
Year 1 3450493 -6554979 3450493 0.8333 2875411
Year 2 3961662 -2593317 7412155 0.6944 2751154
Year 3 3947590 1354273 11359745 0.5787 2284485
Year 4 3249949 4604222 14609694 0.4823 1567298
TOTAL 9478348


The Net NPV after 4 years is -527124

At 20% discount rate the NPV is negative (9478348 - 10005472 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Kay Mary 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 Kay Mary has a NPV value higher than Zero then finance managers at Kay Mary 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 Kay Mary, then the stock price of the Kay Mary 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 Kay Mary 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.

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

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.

Understanding of risks involved in the project.

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.






Negotiation Strategy of Mary Kay Inc.: Asian Market Entry (B)

References & Further Readings

John A. Quelch (2018), "Mary Kay Inc.: Asian Market Entry (B) Harvard Business Review Case Study. Published by HBR Publications.


Toscana Aeroporti SWOT Analysis / TOWS Matrix

Transportation , Misc. Transportation


Relx SWOT Analysis / TOWS Matrix

Services , Printing & Publishing


Lap Kei Engineering SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Gray Television A SWOT Analysis / TOWS Matrix

Services , Broadcasting & Cable TV


ARC Group SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods


Alkindo Naratama SWOT Analysis / TOWS Matrix

Basic Materials , Containers & Packaging


Capricor Therapeutics SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


SCI SWOT Analysis / TOWS Matrix

Services , Personal Services


Purple Capital Ltd SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


RingNet SWOT Analysis / TOWS Matrix

Technology , Computer Networks