The Inexorable Rise of Walmart? 1988-2016 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 Inexorable Rise of Walmart? 1988-2016 case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Inexorable Rise of Walmart? 1988-2016 case study is a Harvard Business School (HBR) case study written by John R. Wells, Gabriel Ellsworth. The The Inexorable Rise of Walmart? 1988-2016 (referred as “Walmart Inexorable” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Business models, Compensation, Competition, Financial management, Growth strategy, IT, Labor, Marketing, Performance measurement, Pricing, Risk management, Supply chain.

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 Inexorable Rise of Walmart? 1988-2016 Case Study

In October 2015, Walmart surprised investors by announcing that it expected flat sales growth for 2015 and growth of only 3% to 4% over the coming three years. Profits would also fall due to significant investments in people and technology. The company's stock price dropped 10% on the news, the largest one-day decline since 1998. In February 2016, Walmart reported that revenues for 2015 had dropped 0.7% to $482.1 billion, the first decline in Walmart's history. The company also downgraded its sales forecast for the coming year, suggesting sales would now be flat. Meanwhile, online retailer Amazon was growing rapidly and, despite being less than one-quarter of the size of Walmart, now boasted a higher market capitalization. Moreover, in April 2016, Alibaba of China announced that it had passed Walmart in global sales to become the biggest retail platform in the world. To add to Walmart's woes, in the United States traditional dollar discount stores and convenience outlets were gaining ground, and wage rises were putting pressure on profits. Meanwhile, international markets continued to underperform. Indeed, some analysts had suggested that Walmart retreat to its U.S. home base to improve performance. Many feared that this was the end of the 50+ year inexorable rise of Walmart. However, CEO Doug McMillon remained determined to get the company back on track and vowed to eschew short-term profits and invest in the future. Investors were not impressed. They had waited a long time for improvements; in 2015, Walmart generated three times the sales and profits it had achieved in 1999, and yet the stock price had barely changed. Patience was running out.

Case Authors : John R. Wells, Gabriel Ellsworth

Topic : Strategy & Execution

Related Areas : Business models, Compensation, Competition, Financial management, Growth strategy, IT, Labor, Marketing, Performance measurement, Pricing, Risk management, Supply chain

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Calculating Net Present Value (NPV) at 6% for The Inexorable Rise of Walmart? 1988-2016 Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019576)	-10019576	-	-
Year 1	3463343	-6556233	3463343	0.9434	3267305
Year 2	3957662	-2598571	7421005	0.89	3522305
Year 3	3946521	1347950	11367526	0.8396	3313575
Year 4	3251877	4599827	14619403	0.7921	2575791
TOTAL			14619403		12678976

The Net Present Value at 6% discount rate is 2659400

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. Profitability Index
2. Internal Rate of Return
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Walmart Inexorable 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 Walmart Inexorable 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 Inexorable Rise of Walmart? 1988-2016

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 Walmart Inexorable 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 Walmart Inexorable 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	(10019576)	-10019576	-	-
Year 1	3463343	-6556233	3463343	0.8696	3011603
Year 2	3957662	-2598571	7421005	0.7561	2992561
Year 3	3946521	1347950	11367526	0.6575	2594902
Year 4	3251877	4599827	14619403	0.5718	1859271
TOTAL					10458337

The Net NPV after 4 years is 438761

(10458337 - 10019576 )

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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	(10019576)	-10019576	-	-
Year 1	3463343	-6556233	3463343	0.8333	2886119
Year 2	3957662	-2598571	7421005	0.6944	2748376
Year 3	3946521	1347950	11367526	0.5787	2283866
Year 4	3251877	4599827	14619403	0.4823	1568228
TOTAL					9486590

The Net NPV after 4 years is -532986

At 20% discount rate the NPV is negative (9486590 - 10019576 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Walmart Inexorable 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 Walmart Inexorable has a NPV value higher than Zero then finance managers at Walmart Inexorable 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 Walmart Inexorable, then the stock price of the Walmart Inexorable 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 Walmart Inexorable 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.

Understanding of risks involved in the project.

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.

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

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 Inexorable Rise of Walmart? 1988-2016

References & Further Readings

John R. Wells, Gabriel Ellsworth (2018), "The Inexorable Rise of Walmart? 1988-2016 Harvard Business Review Case Study. Published by HBR Publications.