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Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine 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 Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine case study is a Harvard Business School (HBR) case study written by Marleen Dieleman, Yue-Jer Lee. The Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine (referred as “Mpm Marine” 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, Growth strategy.

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 Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine Case Study


Marco Polo Marine (MPM) Ltd is a medium-sized Singaporean shipping company listed on the Singapore Stock Exchange, involved in regional shipping and shipbuilding. The company was part of a larger Indonesian family business group, and had been built from scratch by the CEO, the heir to the group. MPM had started off providing barges to transport mining products and sand, initially for the group's mining operations, but increasingly for third parties. It subsequently entered the shipbuilding industry by establishing a shipyard in Batam, Indonesia, an island near Singapore. As a next step to grow the company, the CEO intended to become an international player in the much more sophisticated offshore marine services sector, but he had yet to decide what strategy to take to achieve it. The case study allows students to analyze a global industry and present recommendations to the CEO for positioning the company within this industry. As a company from an emerging market, MPM is an example of an aspiring "emerging market multinational" and the case discusses the challenges such companies face in catching up with more advanced incumbents in global industries. In order to penetrate this market, decisions are required as to what types of vessels to build or buy, which countries to target and how to enter this market given financial constraints and limited technical expertise.


Case Authors : Marleen Dieleman, Yue-Jer Lee

Topic : Strategy & Execution

Related Areas : Entrepreneurship, Growth strategy




Calculating Net Present Value (NPV) at 6% for Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10005728) -10005728 - -
Year 1 3466587 -6539141 3466587 0.9434 3270365
Year 2 3973141 -2566000 7439728 0.89 3536081
Year 3 3966417 1400417 11406145 0.8396 3330280
Year 4 3234917 4635334 14641062 0.7921 2562357
TOTAL 14641062 12699084


The Net Present Value at 6% discount rate is 2693356

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. 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. Timing of the expected cash flows – stockholders of Mpm Marine 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. Mpm Marine shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.




Formula and Steps to Calculate Net Present Value (NPV) of Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine

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 Mpm Marine 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 Mpm Marine 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 (10005728) -10005728 - -
Year 1 3466587 -6539141 3466587 0.8696 3014423
Year 2 3973141 -2566000 7439728 0.7561 3004265
Year 3 3966417 1400417 11406145 0.6575 2607984
Year 4 3234917 4635334 14641062 0.5718 1849574
TOTAL 10476247


The Net NPV after 4 years is 470519

(10476247 - 10005728 )






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 (10005728) -10005728 - -
Year 1 3466587 -6539141 3466587 0.8333 2888823
Year 2 3973141 -2566000 7439728 0.6944 2759126
Year 3 3966417 1400417 11406145 0.5787 2295380
Year 4 3234917 4635334 14641062 0.4823 1560049
TOTAL 9503377


The Net NPV after 4 years is -502351

At 20% discount rate the NPV is negative (9503377 - 10005728 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mpm Marine 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 Mpm Marine has a NPV value higher than Zero then finance managers at Mpm Marine 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 Mpm Marine, then the stock price of the Mpm Marine 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 Mpm Marine 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 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.

Understanding of risks involved in the project.

What will be a multi year spillover effect of various taxation regulations.

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.




References & Further Readings

Marleen Dieleman, Yue-Jer Lee (2018), "Strategic Entrepreneurship in Emerging Market Multinationals: Marco Polo Marine Harvard Business Review Case Study. Published by HBR Publications.