Mission Hills: Leading the China Golf Industry 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 Mission Hills: Leading the China Golf Industry case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Mission Hills: Leading the China Golf Industry case study is a Harvard Business School (HBR) case study written by Mary M. Crossan, Ken Mark. The Mission Hills: Leading the China Golf Industry (referred as “Hills Golf” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Entrepreneurship, IT, Strategic 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 Mission Hills: Leading the China Golf Industry Case Study

The chief executive officer of Mission Hills, a Chinese golf course operator, is reviewing a handful of expansion options. In August 2011, Mission Hills has three large land holdings in Shenzhen, Dongguan, and Haikou, 12,000 employees and 22 golf courses. In addition to golf courses, it owned two luxury hotels and sold houses built within its properties. Mission Hills occupies an average of 60 per cent of the land it currently owns, and Chu is trying to decide if growth should come by expanding to a third Chinese province or if it should continue building in its current land holdings. He wants to identify and mitigate some of the risks that come with running a high growth business.

Case Authors : Mary M. Crossan, Ken Mark

Topic : Strategy & Execution

Related Areas : Entrepreneurship, IT, Strategic planning

Calculating Net Present Value (NPV) at 6% for Mission Hills: Leading the China Golf Industry Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10016546) -10016546 - -
Year 1 3463704 -6552842 3463704 0.9434 3267645
Year 2 3977833 -2575009 7441537 0.89 3540257
Year 3 3970599 1395590 11412136 0.8396 3333791
Year 4 3226358 4621948 14638494 0.7921 2555578
TOTAL 14638494 12697272

The Net Present Value at 6% discount rate is 2680726

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 Hills Golf 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. Hills Golf 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 Mission Hills: Leading the China Golf Industry

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 Hills Golf 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 Hills Golf 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 %
Cash Flows
Year 0 (10016546) -10016546 - -
Year 1 3463704 -6552842 3463704 0.8696 3011917
Year 2 3977833 -2575009 7441537 0.7561 3007813
Year 3 3970599 1395590 11412136 0.6575 2610733
Year 4 3226358 4621948 14638494 0.5718 1844681
TOTAL 10475144

The Net NPV after 4 years is 458598

(10475144 - 10016546 )

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 %
Cash Flows
Year 0 (10016546) -10016546 - -
Year 1 3463704 -6552842 3463704 0.8333 2886420
Year 2 3977833 -2575009 7441537 0.6944 2762384
Year 3 3970599 1395590 11412136 0.5787 2297800
Year 4 3226358 4621948 14638494 0.4823 1555921
TOTAL 9502525

The Net NPV after 4 years is -514021

At 20% discount rate the NPV is negative (9502525 - 10016546 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Hills Golf 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 Hills Golf has a NPV value higher than Zero then finance managers at Hills Golf 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 Hills Golf, then the stock price of the Hills Golf 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 Hills Golf 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.

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 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.

References & Further Readings

Mary M. Crossan, Ken Mark (2018), "Mission Hills: Leading the China Golf Industry Harvard Business Review Case Study. Published by HBR Publications.