Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society 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 Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society case study is a Harvard Business School (HBR) case study written by Christopher Marquis, Zoe Yang, Juelin Yin. The Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society (referred as “Fei Cheng” 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, Strategy.

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 Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society Case Study

As Fei Cheng Wu Rao, China's most popular entertainment program, enters its fourth year, company leaders grapple with questions of how to keep the show fresh and reach new markets. In particular, the show is poised to expand to Africa, yet there are significant questions about how to tailor a program designed to capture the attention of a unique demographic within China to new cultural contexts.

Case Authors : Christopher Marquis, Zoe Yang, Juelin Yin

Topic : Strategy & Execution

Related Areas : Marketing, Strategy

---

Calculating Net Present Value (NPV) at 6% for Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10015036)	-10015036	-	-
Year 1	3467813	-6547223	3467813	0.9434	3271522
Year 2	3965467	-2581756	7433280	0.89	3529252
Year 3	3941290	1359534	11374570	0.8396	3309183
Year 4	3233506	4593040	14608076	0.7921	2561240
TOTAL			14608076		12671196

The Net Present Value at 6% discount rate is 2656160

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. Internal Rate of Return
2. Profitability Index
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 Fei Cheng 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. Fei Cheng 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 Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society

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 Fei Cheng 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 Fei Cheng 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	(10015036)	-10015036	-	-
Year 1	3467813	-6547223	3467813	0.8696	3015490
Year 2	3965467	-2581756	7433280	0.7561	2998463
Year 3	3941290	1359534	11374570	0.6575	2591462
Year 4	3233506	4593040	14608076	0.5718	1848768
TOTAL					10454182

The Net NPV after 4 years is 439146

(10454182 - 10015036 )

---

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	(10015036)	-10015036	-	-
Year 1	3467813	-6547223	3467813	0.8333	2889844
Year 2	3965467	-2581756	7433280	0.6944	2753797
Year 3	3941290	1359534	11374570	0.5787	2280839
Year 4	3233506	4593040	14608076	0.4823	1559368
TOTAL					9483848

The Net NPV after 4 years is -531188

At 20% discount rate the NPV is negative (9483848 - 10015036 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Fei Cheng 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 Fei Cheng has a NPV value higher than Zero then finance managers at Fei Cheng 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 Fei Cheng, then the stock price of the Fei Cheng 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 Fei Cheng 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 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.

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.

---

Negotiation Strategy of Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society

References & Further Readings

Christopher Marquis, Zoe Yang, Juelin Yin (2018), "Fei Cheng Wu Rao (If You Are the One): The Media as a Reflection of Society Harvard Business Review Case Study. Published by HBR Publications.