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Mauboussin Japan: A French Gem in Asia 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 Mauboussin Japan: A French Gem in Asia case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Mauboussin Japan: A French Gem in Asia case study is a Harvard Business School (HBR) case study written by Thierry Delecolle, Ronald G. Kamin, Beatrice Parguel, Gerry Yemen. The Mauboussin Japan: A French Gem in Asia (referred as “Mauboussin Differentiation” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Marketing.

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 Mauboussin Japan: A French Gem in Asia Case Study


As marketers love to teach students, differentiation must be the focal point of marketing strategy. But what happens when a firm's competitive set is shared by similar customers, perceived differentiation is weak among rivals, and loyalty is a thing of the past? This was the dilemma the French luxury jeweler Mauboussin faced: how to leverage its iconic brand to access new customers, domestically and abroad, and through new channels, while preserving the image of luxury goods founded on the myth of rarity and exclusivity? The case was designed and used for the latter portion of an international MBA marketing course and would work well in most international business courses.


Case Authors : Thierry Delecolle, Ronald G. Kamin, Beatrice Parguel, Gerry Yemen

Topic : Sales & Marketing

Related Areas : Marketing




Calculating Net Present Value (NPV) at 6% for Mauboussin Japan: A French Gem in Asia Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10024825) -10024825 - -
Year 1 3466998 -6557827 3466998 0.9434 3270753
Year 2 3970092 -2587735 7437090 0.89 3533368
Year 3 3945261 1357526 11382351 0.8396 3312517
Year 4 3222386 4579912 14604737 0.7921 2552432
TOTAL 14604737 12669069


The Net Present Value at 6% discount rate is 2644244

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. Payback Period
2. Internal Rate of Return
3. Profitability Index
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. Timing of the expected cash flows – stockholders of Mauboussin Differentiation have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Mauboussin Differentiation shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.




Formula and Steps to Calculate Net Present Value (NPV) of Mauboussin Japan: A French Gem in Asia

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 Mauboussin Differentiation 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 Mauboussin Differentiation 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 (10024825) -10024825 - -
Year 1 3466998 -6557827 3466998 0.8696 3014781
Year 2 3970092 -2587735 7437090 0.7561 3001960
Year 3 3945261 1357526 11382351 0.6575 2594073
Year 4 3222386 4579912 14604737 0.5718 1842410
TOTAL 10453224


The Net NPV after 4 years is 428399

(10453224 - 10024825 )






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 (10024825) -10024825 - -
Year 1 3466998 -6557827 3466998 0.8333 2889165
Year 2 3970092 -2587735 7437090 0.6944 2757008
Year 3 3945261 1357526 11382351 0.5787 2283137
Year 4 3222386 4579912 14604737 0.4823 1554006
TOTAL 9483316


The Net NPV after 4 years is -541509

At 20% discount rate the NPV is negative (9483316 - 10024825 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mauboussin Differentiation 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 Mauboussin Differentiation has a NPV value higher than Zero then finance managers at Mauboussin Differentiation 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 Mauboussin Differentiation, then the stock price of the Mauboussin Differentiation 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 Mauboussin Differentiation 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 can impact the cash flow of the project.

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.

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

Thierry Delecolle, Ronald G. Kamin, Beatrice Parguel, Gerry Yemen (2018), "Mauboussin Japan: A French Gem in Asia Harvard Business Review Case Study. Published by HBR Publications.