Whirlpool Corporation's Global Strategy 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 Whirlpool Corporation's Global Strategy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Whirlpool Corporation's Global Strategy case study is a Harvard Business School (HBR) case study written by Andrew C. Inkpen. The Whirlpool Corporation's Global Strategy (referred as “Whirlpool Whirlpool's” 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 Whirlpool Corporation's Global Strategy Case Study

This is a Thunderbird Case Study.This case deals with Whirlpool Corporation (Whirlpool) and its global expansion, which was driven by Whirlpool's objective of becoming the world market leader in home appliances. Beginning with the purchase of a majority stake in an appliance company owned by Philips, the Dutch electronics firm, Whirlpool purchased a majority stake in an Indian firm, established four joint ventures in China, and made new investments in Latin America. By the mid-1990s, serious problems had emerged in Whirlpool's international operations. In 1995, Whirlpool's European profit fell by 50% and in 1996, the company reported a $13 million loss in Europe. In Asia, the situation was even worse. Although the region accounted for only 6% of corporate sales, Whirlpool lost $70 million in Asia in 1996 and $62 million in 1997. In Brazil, Whirlpool found itself a victim in 1997, and again in 1998, of spiraling interest rates.

Case Authors : Andrew C. Inkpen

Topic : Strategy & Execution

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Whirlpool Corporation's Global Strategy Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019071)	-10019071	-	-
Year 1	3456628	-6562443	3456628	0.9434	3260970
Year 2	3972655	-2589788	7429283	0.89	3535649
Year 3	3960343	1370555	11389626	0.8396	3325180
Year 4	3230790	4601345	14620416	0.7921	2559088
TOTAL			14620416		12680887

The Net Present Value at 6% discount rate is 2661816

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. Internal Rate of Return
2. Profitability Index
3. Payback Period
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 Whirlpool Whirlpool's 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. Whirlpool Whirlpool's shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Whirlpool Corporation's Global Strategy

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 Whirlpool Whirlpool's 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 Whirlpool Whirlpool's 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	(10019071)	-10019071	-	-
Year 1	3456628	-6562443	3456628	0.8696	3005763
Year 2	3972655	-2589788	7429283	0.7561	3003898
Year 3	3960343	1370555	11389626	0.6575	2603990
Year 4	3230790	4601345	14620416	0.5718	1847215
TOTAL					10460866

The Net NPV after 4 years is 441795

(10460866 - 10019071 )

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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	(10019071)	-10019071	-	-
Year 1	3456628	-6562443	3456628	0.8333	2880523
Year 2	3972655	-2589788	7429283	0.6944	2758788
Year 3	3960343	1370555	11389626	0.5787	2291865
Year 4	3230790	4601345	14620416	0.4823	1558058
TOTAL					9489235

The Net NPV after 4 years is -529836

At 20% discount rate the NPV is negative (9489235 - 10019071 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Whirlpool Whirlpool's 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 Whirlpool Whirlpool's has a NPV value higher than Zero then finance managers at Whirlpool Whirlpool's 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 Whirlpool Whirlpool's, then the stock price of the Whirlpool Whirlpool's 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 Whirlpool Whirlpool's 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 can impact the cash flow of the project.

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.

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 Whirlpool Corporation's Global Strategy

References & Further Readings

Andrew C. Inkpen (2018), "Whirlpool Corporation's Global Strategy Harvard Business Review Case Study. Published by HBR Publications.