ITC e-Choupal: Corporate Social Responsibility in Rural India 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 ITC e-Choupal: Corporate Social Responsibility in Rural India case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. ITC e-Choupal: Corporate Social Responsibility in Rural India case study is a Harvard Business School (HBR) case study written by Ali Farhoomand, Saurabh Bhatnagar. The ITC e-Choupal: Corporate Social Responsibility in Rural India (referred as “Choupal Itc” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Government, Operations management, Social enterprise, 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 ITC e-Choupal: Corporate Social Responsibility in Rural India Case Study

Set against the backdrop of under-served, over-exploited rural India, this case highlights how the use of technology by the Indian conglomerate ITC transformed the lives of many rural Indians at the same time that it was benefiting the company. Continually plagued by an inefficient supply chain in rural agriculture, ITC implemented the e-Choupal initiative in 2000. Under the initiative, ITC set up small Internet kiosks in villages that allowed farmers access to an efficient and transparent alternative to the traditional mandi for marketing their produce. By establishing a direct channel between the farmer and ITC, e-Choupal significantly marginalized the role of middlemen, thereby ensuring farmers more money for their produce. In doing so, e-Choupal not only mitigated ITC's agrarian supply chain concerns but also achieved a greater good-the economic uplift and empowerment of the Indian farmer. Although e-Choupal was conceived as ITC's answer to their supply chain woes, ITC was quick to realize that they had discovered the delicate balance between achieving corporate profitability and making a social contribution. Aware of the multitude of challenges faced by impoverished rural Indians, ITC extended its e-Choupal framework to deliver core services, such as access to health care, education and information. They even liaised with other companies, including fast-moving consumer goods companies and finance companies, to deliver products and services to rural Indians that had previously commanded huge premiums or were simply unavailable. Evolving into a platform for community development, e-Choupal was both eradicating poverty and chipping away at rural isolation, even while ITC continued to enjoy the benefits of functional procurement and distribution value chains.

Case Authors : Ali Farhoomand, Saurabh Bhatnagar

Topic : Strategy & Execution

Related Areas : Government, Operations management, Social enterprise, Social responsibility

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Calculating Net Present Value (NPV) at 6% for ITC e-Choupal: Corporate Social Responsibility in Rural India Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10013356)	-10013356	-	-
Year 1	3469588	-6543768	3469588	0.9434	3273196
Year 2	3966883	-2576885	7436471	0.89	3530512
Year 3	3964809	1387924	11401280	0.8396	3328930
Year 4	3237277	4625201	14638557	0.7921	2564227
TOTAL			14638557		12696865

The Net Present Value at 6% discount rate is 2683509

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. Payback Period
2. Net Present Value
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. Choupal Itc 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 Choupal Itc 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 ITC e-Choupal: Corporate Social Responsibility in Rural India

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 Strategy & Execution 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 Choupal Itc 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 Choupal Itc 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	(10013356)	-10013356	-	-
Year 1	3469588	-6543768	3469588	0.8696	3017033
Year 2	3966883	-2576885	7436471	0.7561	2999533
Year 3	3964809	1387924	11401280	0.6575	2606926
Year 4	3237277	4625201	14638557	0.5718	1850924
TOTAL					10474416

The Net NPV after 4 years is 461060

(10474416 - 10013356 )

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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	(10013356)	-10013356	-	-
Year 1	3469588	-6543768	3469588	0.8333	2891323
Year 2	3966883	-2576885	7436471	0.6944	2754780
Year 3	3964809	1387924	11401280	0.5787	2294450
Year 4	3237277	4625201	14638557	0.4823	1561187
TOTAL					9501740

The Net NPV after 4 years is -511616

At 20% discount rate the NPV is negative (9501740 - 10013356 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Choupal Itc 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 Choupal Itc has a NPV value higher than Zero then finance managers at Choupal Itc 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 Choupal Itc, then the stock price of the Choupal Itc 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 Choupal Itc 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 –

Understanding of risks involved in the project.

What can impact the cash flow of the project.

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

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.

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Negotiation Strategy of ITC e-Choupal: Corporate Social Responsibility in Rural India

References & Further Readings

Ali Farhoomand, Saurabh Bhatnagar (2018), "ITC e-Choupal: Corporate Social Responsibility in Rural India Harvard Business Review Case Study. Published by HBR Publications.