Wal-Mart's Global Women's Economic Empowerment Initiative 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 Wal-Mart's Global Women's Economic Empowerment Initiative case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Wal-Mart's Global Women's Economic Empowerment Initiative case study is a Harvard Business School (HBR) case study written by Kellie A. McElhaney. The Wal-Mart's Global Women's Economic Empowerment Initiative (referred as “Gweei Wal” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customers, Diversity, Gender, Public relations, Social responsibility.

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 Wal-Mart's Global Women's Economic Empowerment Initiative Case Study

University of California, Berkeley-Haas collectionThis case focuses on Wal-Mart's Global Women's Economic Empowerment Initiative (GWEEI) that was launched in September 2011. The case examines GWEEI's business rationale, contrasts GWEEI against women-based initiatives introduced by other Fortune 500 companies, and discusses how GWEEI fits in with Wal-Mart's existing portfolio of corporate responsibility initiatives. Students will have the opportunity to evaluate GWEEI and determine why the retailer chose to launch this initiative. The case ends with several questions, including those asking how Wal-Mart can link GWEEI to its brand and reputation and how other companies can invest in women. This provides an opportunity to discuss how Wal-Mart and other companies are using social responsibility initiatives to both grow their businesses and counter past organizational criticism. Please note: this case also has a supplementary case available. The supplement can be found using product number B5794.

Case Authors : Kellie A. McElhaney

Topic : Sales & Marketing

Related Areas : Customers, Diversity, Gender, Public relations, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Wal-Mart's Global Women's Economic Empowerment Initiative Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027000)	-10027000	-	-
Year 1	3458291	-6568709	3458291	0.9434	3262539
Year 2	3968269	-2600440	7426560	0.89	3531745
Year 3	3944831	1344391	11371391	0.8396	3312156
Year 4	3244129	4588520	14615520	0.7921	2569654
TOTAL			14615520		12676094

The Net Present Value at 6% discount rate is 2649094

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. Net Present Value
3. Profitability Index
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. Gweei Wal 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 Gweei Wal 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 Wal-Mart's Global Women's Economic Empowerment Initiative

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 Gweei Wal 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 Gweei Wal 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	(10027000)	-10027000	-	-
Year 1	3458291	-6568709	3458291	0.8696	3007210
Year 2	3968269	-2600440	7426560	0.7561	3000581
Year 3	3944831	1344391	11371391	0.6575	2593790
Year 4	3244129	4588520	14615520	0.5718	1854841
TOTAL					10456423

The Net NPV after 4 years is 429423

(10456423 - 10027000 )

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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	(10027000)	-10027000	-	-
Year 1	3458291	-6568709	3458291	0.8333	2881909
Year 2	3968269	-2600440	7426560	0.6944	2755742
Year 3	3944831	1344391	11371391	0.5787	2282888
Year 4	3244129	4588520	14615520	0.4823	1564491
TOTAL					9485031

The Net NPV after 4 years is -541969

At 20% discount rate the NPV is negative (9485031 - 10027000 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Gweei Wal 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 Gweei Wal has a NPV value higher than Zero then finance managers at Gweei Wal 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 Gweei Wal, then the stock price of the Gweei Wal 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 Gweei Wal 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 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.

What can impact the cash flow of the project.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in 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 Wal-Mart's Global Women's Economic Empowerment Initiative

References & Further Readings

Kellie A. McElhaney (2018), "Wal-Mart's Global Women's Economic Empowerment Initiative Harvard Business Review Case Study. Published by HBR Publications.