Citibank's e-Business Strategy for Global Corporate Banking 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 Citibank's e-Business Strategy for Global Corporate Banking case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Citibank's e-Business Strategy for Global Corporate Banking case study is a Harvard Business School (HBR) case study written by Julie Yu, Ali F. Farhoomand, Marissa McCauley, Shamza Khan. The Citibank's e-Business Strategy for Global Corporate Banking (referred as “Citibank Citibank'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, Marketing.

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 Citibank's e-Business Strategy for Global Corporate Banking Case Study

In 2001, Citibank's Cash and Trade Group division transformed itself into an e-business, with the strategic intent of converting traditional money management business into an e-business framework. This case discusses how Citibank is using its traditional assets and integrating Internet initiatives into its e-business strategy to create sustainable competitive advantages. Competition in the cash and trade business is becoming intense and a new breed of competent and aggressive competitors is vying for the market, including technology companies interested in B2B e-payment. Citibank is responding to the competition by continually evolving its e-business strategy--connect, transform, extend. Also looks into the challenges that Citibank e-Business Group is facing in developing a single global web platform for the corporate market. The focus is on how Citibank is developing an e-business product that would serve the highly segmented market and how to encourage these markets to use a global single platform online. At one end of the spectrum are multinationals and top-level domestic corporates that operate sophisticated treasuries, and at the other end are companies and small- and medium-size businesses that are not yet ready to upgrade and transform their systems.

Case Authors : Julie Yu, Ali F. Farhoomand, Marissa McCauley, Shamza Khan

Topic : Strategy & Execution

Related Areas : Marketing

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Calculating Net Present Value (NPV) at 6% for Citibank's e-Business Strategy for Global Corporate Banking Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10029869)	-10029869	-	-
Year 1	3455968	-6573901	3455968	0.9434	3260347
Year 2	3960366	-2613535	7416334	0.89	3524712
Year 3	3936620	1323085	11352954	0.8396	3305262
Year 4	3245137	4568222	14598091	0.7921	2570452
TOTAL			14598091		12660773

The Net Present Value at 6% discount rate is 2630904

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. Payback Period
3. Profitability Index
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. Citibank Citibank's 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 Citibank Citibank'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.

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Formula and Steps to Calculate Net Present Value (NPV) of Citibank's e-Business Strategy for Global Corporate Banking

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 Citibank Citibank'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 Citibank Citibank'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	(10029869)	-10029869	-	-
Year 1	3455968	-6573901	3455968	0.8696	3005190
Year 2	3960366	-2613535	7416334	0.7561	2994606
Year 3	3936620	1323085	11352954	0.6575	2588392
Year 4	3245137	4568222	14598091	0.5718	1855418
TOTAL					10443604

The Net NPV after 4 years is 413735

(10443604 - 10029869 )

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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	(10029869)	-10029869	-	-
Year 1	3455968	-6573901	3455968	0.8333	2879973
Year 2	3960366	-2613535	7416334	0.6944	2750254
Year 3	3936620	1323085	11352954	0.5787	2278137
Year 4	3245137	4568222	14598091	0.4823	1564977
TOTAL					9473341

The Net NPV after 4 years is -556528

At 20% discount rate the NPV is negative (9473341 - 10029869 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Citibank Citibank'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 Citibank Citibank's has a NPV value higher than Zero then finance managers at Citibank Citibank'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 Citibank Citibank's, then the stock price of the Citibank Citibank'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 Citibank Citibank'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 can impact the cash flow of the project.

Understanding of risks involved in 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.

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.

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 Citibank's e-Business Strategy for Global Corporate Banking

References & Further Readings

Julie Yu, Ali F. Farhoomand, Marissa McCauley, Shamza Khan (2018), "Citibank's e-Business Strategy for Global Corporate Banking Harvard Business Review Case Study. Published by HBR Publications.