Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission 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 Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission case study is a Harvard Business School (HBR) case study written by Robert A. Burgelman, Debra Schifrin. The Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission (referred as “Nissan's Electric” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, .

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 Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission Case Study

This case details the strategic decisions that went into Nissan's development of the LEAF, the first mass- produced all-electric car. Carlos Ghosn, president and CEO of the Renault-Nissan Alliance, was making a $5 billion bet that electric cars would be the wave of the future. The Alliance was building capacity for 500,000 zero-emission vehicles in Japan, the United States and Europe. The case covers the inception and launch of the LEAF; Nissan's marketing strategy for the car; the building of charging stations; and Nissan's electric car strategy in the context of the Renault-Nissan Alliance. It also discusses the challenges caused by the high cost of electric vehicle batteries, as well as the advantages of Nissan's joint venture with Japanese battery maker NEC. To handle battery reuse and recycling, Nissan created a separate company called 4R Energy Corporation. The case also provides an overview of the electric car industry and the different economic, psychological and political forces that could either advance or impede the success of the electric car. It discusses Nissan's competitors, including: General Motors, which came out with its plug-in hybrid vehicle the Volt at the same time the LEAF was launched; Tesla; China-based BYD; and the upcoming electric cars promised by Ford, Volkswagen and Toyota.

Case Authors : Robert A. Burgelman, Debra Schifrin

Topic : Strategy & Execution

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019967)	-10019967	-	-
Year 1	3457107	-6562860	3457107	0.9434	3261422
Year 2	3961979	-2600881	7419086	0.89	3526147
Year 3	3970436	1369555	11389522	0.8396	3333655
Year 4	3246252	4615807	14635774	0.7921	2571336
TOTAL			14635774		12692559

The Net Present Value at 6% discount rate is 2672592

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. Net Present Value
2. Internal Rate of Return
3. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Nissan's Electric 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 Nissan's Electric 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 Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission

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 Nissan's Electric 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 Nissan's Electric 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	(10019967)	-10019967	-	-
Year 1	3457107	-6562860	3457107	0.8696	3006180
Year 2	3961979	-2600881	7419086	0.7561	2995825
Year 3	3970436	1369555	11389522	0.6575	2610626
Year 4	3246252	4615807	14635774	0.5718	1856055
TOTAL					10468687

The Net NPV after 4 years is 448720

(10468687 - 10019967 )

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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	(10019967)	-10019967	-	-
Year 1	3457107	-6562860	3457107	0.8333	2880923
Year 2	3961979	-2600881	7419086	0.6944	2751374
Year 3	3970436	1369555	11389522	0.5787	2297706
Year 4	3246252	4615807	14635774	0.4823	1565515
TOTAL					9495518

The Net NPV after 4 years is -524449

At 20% discount rate the NPV is negative (9495518 - 10019967 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nissan's Electric 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 Nissan's Electric has a NPV value higher than Zero then finance managers at Nissan's Electric 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 Nissan's Electric, then the stock price of the Nissan's Electric 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 Nissan's Electric 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.

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.

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

Understanding of risks involved in 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.

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Negotiation Strategy of Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission

References & Further Readings

Robert A. Burgelman, Debra Schifrin (2018), "Nissan's Electric Vehicle Strategy in 2011: Leading the Way Toward Zero-Emission Harvard Business Review Case Study. Published by HBR Publications.