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Globe Telecom 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 Globe Telecom case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Globe Telecom case study is a Harvard Business School (HBR) case study written by Tarun Khanna, Krishna G. Palepu, Ingrid Vargas. The Globe Telecom (referred as “Telecom Filipino” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Entrepreneurship, Joint ventures, Regulation.

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 Globe Telecom Case Study


The Ayala Group, one of the oldest and largest Filipino business groups, partnered with Singapore Telecommunications (SingTel) to launch a telecom venture following industry deregulation in the Philippines. The partners must decide whether to continue the venture in light of current poor performance but significant future potential. Addresses the complexity of newly deregulated industries, financing in emerging markets, and the role of business groups in economic development. A rewritten version of an earlier case.


Case Authors : Tarun Khanna, Krishna G. Palepu, Ingrid Vargas

Topic : Strategy & Execution

Related Areas : Entrepreneurship, Joint ventures, Regulation




Calculating Net Present Value (NPV) at 6% for Globe Telecom Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10006646) -10006646 - -
Year 1 3444951 -6561695 3444951 0.9434 3249954
Year 2 3971574 -2590121 7416525 0.89 3534687
Year 3 3962456 1372335 11378981 0.8396 3326954
Year 4 3239140 4611475 14618121 0.7921 2565702
TOTAL 14618121 12677297


The Net Present Value at 6% discount rate is 2670651

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. 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. Telecom Filipino 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 Telecom Filipino have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of Globe Telecom

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 Telecom Filipino 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 Telecom Filipino 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 (10006646) -10006646 - -
Year 1 3444951 -6561695 3444951 0.8696 2995610
Year 2 3971574 -2590121 7416525 0.7561 3003081
Year 3 3962456 1372335 11378981 0.6575 2605379
Year 4 3239140 4611475 14618121 0.5718 1851989
TOTAL 10456058


The Net NPV after 4 years is 449412

(10456058 - 10006646 )






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 (10006646) -10006646 - -
Year 1 3444951 -6561695 3444951 0.8333 2870793
Year 2 3971574 -2590121 7416525 0.6944 2758038
Year 3 3962456 1372335 11378981 0.5787 2293088
Year 4 3239140 4611475 14618121 0.4823 1562085
TOTAL 9484003


The Net NPV after 4 years is -522643

At 20% discount rate the NPV is negative (9484003 - 10006646 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Telecom Filipino 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 Telecom Filipino has a NPV value higher than Zero then finance managers at Telecom Filipino 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 Telecom Filipino, then the stock price of the Telecom Filipino 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 Telecom Filipino 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 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 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.

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.




Negotiation Strategy of Globe Telecom

References & Further Readings

Tarun Khanna, Krishna G. Palepu, Ingrid Vargas (2018), "Globe Telecom Harvard Business Review Case Study. Published by HBR Publications.