Quintiles IPO 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 Quintiles IPO case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Quintiles IPO case study is a Harvard Business School (HBR) case study written by David P. Stowell, Vishwas Setia. The Quintiles IPO (referred as “Quintiles Buyout” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Financial analysis, Financial management, IPO, 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

Case Description of Quintiles IPO Case Study

Quintiles Transnational Holdings Inc., the largest global provider of biopharmaceutical development and commercial outsourcing services, grew its revenue at a CAGR of 7.3% and EBITDA at 13.9% between 2008 and 2012. The case is set in December 2012-April 2013, when the majority of the firm was owned by founder Dennis Gillings and four private equity firms (Bain Capital, TPG Capital, 3i Capital and Temasek Life Sciences) after it was taken private in a management-led buyout in 2003 and a subsequent buyout in 2008. Five years after the second buyout, the private equity firm owners were looking to monetize their positions and considered different strategic alternatives: M&A sale to strategic or financial buyers, IPO, or capital restructuring through special dividends. Students will step into the role of an associate at the lead investment bank working with Quintiles. They must consider the case information and determine an IPO strategy, process, potential conflicts, and valuation.

Case Authors : David P. Stowell, Vishwas Setia

Topic : Finance & Accounting

Related Areas : Financial analysis, Financial management, IPO, Mergers & acquisitions

Calculating Net Present Value (NPV) at 6% for Quintiles IPO Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10021995) -10021995 - -
Year 1 3459159 -6562836 3459159 0.9434 3263358
Year 2 3982438 -2580398 7441597 0.89 3544356
Year 3 3974582 1394184 11416179 0.8396 3337136
Year 4 3223658 4617842 14639837 0.7921 2553439
TOTAL 14639837 12698288

The Net Present Value at 6% discount rate is 2676293

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. Profitability Index
4. Internal Rate of Return

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. Quintiles Buyout 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 Quintiles Buyout 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 Quintiles IPO

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 Finance & Accounting 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 Quintiles Buyout 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 Quintiles Buyout 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 %
Cash Flows
Year 0 (10021995) -10021995 - -
Year 1 3459159 -6562836 3459159 0.8696 3007964
Year 2 3982438 -2580398 7441597 0.7561 3011295
Year 3 3974582 1394184 11416179 0.6575 2613352
Year 4 3223658 4617842 14639837 0.5718 1843137
TOTAL 10475749

The Net NPV after 4 years is 453754

(10475749 - 10021995 )

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 %
Cash Flows
Year 0 (10021995) -10021995 - -
Year 1 3459159 -6562836 3459159 0.8333 2882633
Year 2 3982438 -2580398 7441597 0.6944 2765582
Year 3 3974582 1394184 11416179 0.5787 2300105
Year 4 3223658 4617842 14639837 0.4823 1554619
TOTAL 9502939

The Net NPV after 4 years is -519056

At 20% discount rate the NPV is negative (9502939 - 10021995 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Quintiles Buyout 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 Quintiles Buyout has a NPV value higher than Zero then finance managers at Quintiles Buyout 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 Quintiles Buyout, then the stock price of the Quintiles Buyout 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 Quintiles Buyout 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 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.

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.

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.

References & Further Readings

David P. Stowell, Vishwas Setia (2018), "Quintiles IPO Harvard Business Review Case Study. Published by HBR Publications.