Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group 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 Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group case study is a Harvard Business School (HBR) case study written by Beng Geok Wee, Geraldine Chen, Ivy Buche. The Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group (referred as “Palm Wilmar” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, International business, Mergers & acquisitions, Supply chain, Sustainability.

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 Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group Case Study

Established in 1991, Wilmar grew rapidly to become one of the largest palm oil companies in Southeast Asia, with revenue and net profits of US$23.9 billion and US$1.88 billion respectively for the year ended March 2009. It operated in the entire value chain of the industry, from plantations to processing, merchandising, shipping and distribution. As the third-largest listed plantation company in the world, it operated 300 processing plants and had an extensive global distribution network. Its products sold in more than 50 countries, including China and India. As the global demand for palm oil grew, environmental groups were concerned about the impact of palm oil industry on the social and natural environment, such as loss of forest ecosystems, environmental damage, soil degradation, pollution, greenhouse gas emissions and climate change. They were pressuring palm oil producers, including Wilmar, to take action to address these issues. By late 2010, Wilmar had two strategic initiatives to drive future growth. It was poised to acquire Sucrogen, Australia's largest sugar company with operations in sugar milling and refining, bioethanol production and generation of renewable electricity. It was also expanding into sub-Saharan Africa, where many governments were keen to support the development of commercially managed large-scale oil palm projects. However, as in Asia, palm oil producers and governments could expect to encounter pressure from environmental groups with regard to possible adverse effects. The challenge was to manage these initiatives and the environmentalists' demands for more sustainable operations.

Case Authors : Beng Geok Wee, Geraldine Chen, Ivy Buche

Topic : Strategy & Execution

Related Areas : International business, Mergers & acquisitions, Supply chain, Sustainability

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Calculating Net Present Value (NPV) at 6% for Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009678)	-10009678	-	-
Year 1	3447759	-6561919	3447759	0.9434	3252603
Year 2	3970883	-2591036	7418642	0.89	3534072
Year 3	3961965	1370929	11380607	0.8396	3326542
Year 4	3238725	4609654	14619332	0.7921	2565374
TOTAL			14619332		12678590

The Net Present Value at 6% discount rate is 2668912

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. Profitability Index
3. Internal Rate of Return
4. Payback Period

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 Palm Wilmar 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. Palm Wilmar shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group

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 Palm Wilmar 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 Palm Wilmar 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	(10009678)	-10009678	-	-
Year 1	3447759	-6561919	3447759	0.8696	2998051
Year 2	3970883	-2591036	7418642	0.7561	3002558
Year 3	3961965	1370929	11380607	0.6575	2605056
Year 4	3238725	4609654	14619332	0.5718	1851752
TOTAL					10457417

The Net NPV after 4 years is 447739

(10457417 - 10009678 )

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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	(10009678)	-10009678	-	-
Year 1	3447759	-6561919	3447759	0.8333	2873133
Year 2	3970883	-2591036	7418642	0.6944	2757558
Year 3	3961965	1370929	11380607	0.5787	2292804
Year 4	3238725	4609654	14619332	0.4823	1561885
TOTAL					9485379

The Net NPV after 4 years is -524299

At 20% discount rate the NPV is negative (9485379 - 10009678 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Palm Wilmar 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 Palm Wilmar has a NPV value higher than Zero then finance managers at Palm Wilmar 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 Palm Wilmar, then the stock price of the Palm Wilmar 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 Palm Wilmar 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 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.

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.

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 Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group

References & Further Readings

Beng Geok Wee, Geraldine Chen, Ivy Buche (2018), "Wilmar International Limited - Managing Multiple Stakeholders in a Global Palm Oil Agribusiness Group Harvard Business Review Case Study. Published by HBR Publications.