The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property 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 The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property case study is a Harvard Business School (HBR) case study written by Hugh Stephens, Charles Krusekopf. The The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property (referred as “Casbaa Cable” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. 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 The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property Case Study

The vice-president of policy for the Cable and Satellite Broadcasting Association of Asia (CASBAA) was asked to deal with the growing problem of signal piracy in the Philippines. CASBAA was an organization of 125 companies involving all elements of the pay television industry in Asia, including major multinational content and broadcasting companies, as well as leading Philippine cable distributors. These were multinational content producers and broadcasters concerned about the growing issue of cable television signal piracy in the Philippines - a key bellwether market for many CASBAA members. Among CASBAA's key objectives was the protection of the intellectual property of its members. CASBAA had already pursued legal options to curtail piracy in the Philippines with limited success and the vice-president was tasked with developing a strategy that did not involve expensive litigation. To do so, he needed to present a plan, with milestones, to his constituents to demonstrate that CASBAA was capable of dealing with its members' concerns. Hugh Stephens is affiliated with Royal Roads University. Charles Krusekopf is affiliated with Royal Roads University.

Case Authors : Hugh Stephens, Charles Krusekopf

Topic : Strategy & Execution

Related Areas :

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Calculating Net Present Value (NPV) at 6% for The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10028563)	-10028563	-	-
Year 1	3448874	-6579689	3448874	0.9434	3253655
Year 2	3953087	-2626602	7401961	0.89	3518233
Year 3	3952074	1325472	11354035	0.8396	3318238
Year 4	3242964	4568436	14596999	0.7921	2568731
TOTAL			14596999		12658857

The Net Present Value at 6% discount rate is 2630294

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. Profitability Index
3. Internal Rate of Return
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Casbaa Cable 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 Casbaa Cable 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 The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property

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 Casbaa Cable 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 Casbaa Cable 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	(10028563)	-10028563	-	-
Year 1	3448874	-6579689	3448874	0.8696	2999021
Year 2	3953087	-2626602	7401961	0.7561	2989102
Year 3	3952074	1325472	11354035	0.6575	2598553
Year 4	3242964	4568436	14596999	0.5718	1854175
TOTAL					10440851

The Net NPV after 4 years is 412288

(10440851 - 10028563 )

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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	(10028563)	-10028563	-	-
Year 1	3448874	-6579689	3448874	0.8333	2874062
Year 2	3953087	-2626602	7401961	0.6944	2745199
Year 3	3952074	1325472	11354035	0.5787	2287080
Year 4	3242964	4568436	14596999	0.4823	1563929
TOTAL					9470270

The Net NPV after 4 years is -558293

At 20% discount rate the NPV is negative (9470270 - 10028563 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Casbaa Cable 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 Casbaa Cable has a NPV value higher than Zero then finance managers at Casbaa Cable 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 Casbaa Cable, then the stock price of the Casbaa Cable 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 Casbaa Cable 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 will be a multi year spillover effect of various taxation regulations.

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 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 The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property

References & Further Readings

Hugh Stephens, Charles Krusekopf (2018), "The Cable and Satellite Broadcasting Association of Asia: Protecting Intellectual Property Harvard Business Review Case Study. Published by HBR Publications.