Lance Armstrong and Livestrong Foundation: Rising Again After the Fall 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 Lance Armstrong and Livestrong Foundation: Rising Again After the Fall case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Lance Armstrong and Livestrong Foundation: Rising Again After the Fall case study is a Harvard Business School (HBR) case study written by Dheeraj Sharma, Varsha Verma. The Lance Armstrong and Livestrong Foundation: Rising Again After the Fall (referred as “Armstrong Livestrong” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, .

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 Lance Armstrong and Livestrong Foundation: Rising Again After the Fall Case Study

Lance Armstrong, a world-famous cyclist, was charged with using performance-enhancing drugs (i.e. "doping"). Armstrong had vehemently denied similar charges a few years earlier; however, this time there was substantial proof available and Armstrong accepted the charges. Subsequent to this news, most of the brands that had endorsed Armstrong terminated their contracts with him. As a cancer survivor, Armstrong had started Livestrong Foundation, an organization to support cancer patients, caregivers and survivors. This foundation depended heavily on sponsorships received by Armstrong. To protect his foundation from the negative impact of the doping controversy, Armstrong immediately resigned from both his post as chairman of Livestrong and from its board of directors. Despite his efforts, Livestrong was losing its sponsorships and a solution was needed to reduce the negative publicity, stop the loss of funding and identify new sources of funding.

Case Authors : Dheeraj Sharma, Varsha Verma

Topic : Sales & Marketing

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Lance Armstrong and Livestrong Foundation: Rising Again After the Fall Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10007264)	-10007264	-	-
Year 1	3461602	-6545662	3461602	0.9434	3265662
Year 2	3973316	-2572346	7434918	0.89	3536237
Year 3	3941426	1369080	11376344	0.8396	3309297
Year 4	3245667	4614747	14622011	0.7921	2570872
TOTAL			14622011		12682069

The Net Present Value at 6% discount rate is 2674805

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. Profitability Index
2. Net Present Value
3. Internal Rate of Return
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. Armstrong Livestrong 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 Armstrong Livestrong 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 Lance Armstrong and Livestrong Foundation: Rising Again After the Fall

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 Armstrong Livestrong 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 Armstrong Livestrong 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	(10007264)	-10007264	-	-
Year 1	3461602	-6545662	3461602	0.8696	3010089
Year 2	3973316	-2572346	7434918	0.7561	3004398
Year 3	3941426	1369080	11376344	0.6575	2591552
Year 4	3245667	4614747	14622011	0.5718	1855721
TOTAL					10461759

The Net NPV after 4 years is 454495

(10461759 - 10007264 )

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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	(10007264)	-10007264	-	-
Year 1	3461602	-6545662	3461602	0.8333	2884668
Year 2	3973316	-2572346	7434918	0.6944	2759247
Year 3	3941426	1369080	11376344	0.5787	2280918
Year 4	3245667	4614747	14622011	0.4823	1565233
TOTAL					9490066

The Net NPV after 4 years is -517198

At 20% discount rate the NPV is negative (9490066 - 10007264 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Armstrong Livestrong 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 Armstrong Livestrong has a NPV value higher than Zero then finance managers at Armstrong Livestrong 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 Armstrong Livestrong, then the stock price of the Armstrong Livestrong 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 Armstrong Livestrong 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.

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Negotiation Strategy of Lance Armstrong and Livestrong Foundation: Rising Again After the Fall

References & Further Readings

Dheeraj Sharma, Varsha Verma (2018), "Lance Armstrong and Livestrong Foundation: Rising Again After the Fall Harvard Business Review Case Study. Published by HBR Publications.