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NPV: ASOS PLC Net Present Value Case Analysis
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ASOS PLC 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 ASOS PLC case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. ASOS PLC case study is a Harvard Business School (HBR) case study written by John R. Wells, Gabriel Ellsworth. The ASOS PLC (referred as “Asos Beighton” 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 history, Business models, Business processes, Competition, Crisis management, Currency, Customers, Entrepreneurship, Financial management, Gender, Growth strategy, International business, Internet, Mergers & acquisitions, Succession planning.

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 ASOS PLC Case Study


Launched in 2000, ASOS was one of the world's largest online fashion specialists in 2016. Focusing on young consumers aged 16-25 years, the company offered over 80,000 items on its websites, many times more than the largest fashion stores, and added several thousand new lines every week. Based in the United Kingdom, ASOS shipped products to 240 countries and territories, and international sales represented more than 50% of total revenues. But when new CEO Nick Beighton took over from founder Nick Robertson in September 2015, he faced some significant challenges. While ASOS was large by online standards, traditional fashion retailers were building their own online sales capabilities, and Amazon was expanding its apparel offering. Meanwhile, new online competitors were emerging at a rapid rate. After ASOS issued several profit warnings in 2014, its growth had slowed to 18% in 2015. Beighton was convinced that ASOS's strategy was right and that the company needed to improve its execution to recapture its historical success. Some analysts were not so sure, and the stock price still had not recovered from its 2014 fall. ASOS' goal was to be "the world's no.1 fashion destination for 20-somethings." Did this lofty ambition make sense? And did ASOS have the right strategy to achieve it?


Case Authors : John R. Wells, Gabriel Ellsworth

Topic : Strategy & Execution

Related Areas : Business history, Business models, Business processes, Competition, Crisis management, Currency, Customers, Entrepreneurship, Financial management, Gender, Growth strategy, International business, Internet, Mergers & acquisitions, Succession planning




Calculating Net Present Value (NPV) at 6% for ASOS PLC Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10017436) -10017436 - -
Year 1 3456822 -6560614 3456822 0.9434 3261153
Year 2 3962006 -2598608 7418828 0.89 3526171
Year 3 3967793 1369185 11386621 0.8396 3331436
Year 4 3245928 4615113 14632549 0.7921 2571079
TOTAL 14632549 12689839


The Net Present Value at 6% discount rate is 2672403

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. 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. Timing of the expected cash flows – stockholders of Asos Beighton 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. Asos Beighton 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 ASOS PLC

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 Asos Beighton 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 Asos Beighton 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 (10017436) -10017436 - -
Year 1 3456822 -6560614 3456822 0.8696 3005932
Year 2 3962006 -2598608 7418828 0.7561 2995846
Year 3 3967793 1369185 11386621 0.6575 2608888
Year 4 3245928 4615113 14632549 0.5718 1855870
TOTAL 10466536


The Net NPV after 4 years is 449100

(10466536 - 10017436 )






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 (10017436) -10017436 - -
Year 1 3456822 -6560614 3456822 0.8333 2880685
Year 2 3962006 -2598608 7418828 0.6944 2751393
Year 3 3967793 1369185 11386621 0.5787 2296177
Year 4 3245928 4615113 14632549 0.4823 1565359
TOTAL 9493613


The Net NPV after 4 years is -523823

At 20% discount rate the NPV is negative (9493613 - 10017436 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Asos Beighton 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 Asos Beighton has a NPV value higher than Zero then finance managers at Asos Beighton 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 Asos Beighton, then the stock price of the Asos Beighton 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 Asos Beighton 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 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.




References & Further Readings

John R. Wells, Gabriel Ellsworth (2018), "ASOS PLC Harvard Business Review Case Study. Published by HBR Publications.