Mazda Motor Corporation: Surviving by Partnering with the Giants 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 Mazda Motor Corporation: Surviving by Partnering with the Giants case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Mazda Motor Corporation: Surviving by Partnering with the Giants case study is a Harvard Business School (HBR) case study written by Wiboon Kittilaksanawong, Tae Kyung Lee, Andrew Jiro Poplawski. The Mazda Motor Corporation: Surviving by Partnering with the Giants (referred as “Mazda Motor” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Financial markets, Innovation, Joint ventures, Managing people, Reorganization.

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 Mazda Motor Corporation: Surviving by Partnering with the Giants Case Study

For 30 years, Mazda Motor Corporation (Mazda) partnered with Ford Motor Company (Ford), helping Ford in small-car engineering and lean manufacturing in exchange for finance and marketing know-how; however, this alliance was terminated due to the global financial crisis in 2008. In 2015, Mazda entered into another long-term partnership to share technologies and cope with cost pressures-this time with Toyota Motor Corporation (Toyota). According to its 2016 Structural Reform Plan, Mazda aimed to achieve a global sales volume of 1.65 million units, an operating income ratio of at least 7 per cent, an equity ratio of at least 45 per cent, and a dividend payout ratio of at least 20 per cent by 2019. Given the highly competitive domestic and global automotive markets, to what extent could the partnership with Toyota and the Structural Reform Plan allow Mazda to achieve these goals? Would Mazda need to make any changes to its competitive strategies to keep the company driving forward? Wiboon Kittilaksanawong is affiliated with Saitama University. The authors Tae Kyung Lee and Andrew Jiro Poplawski are affiliated with Nagoya University of Commerce & Business.

Case Authors : Wiboon Kittilaksanawong, Tae Kyung Lee, Andrew Jiro Poplawski

Topic : Global Business

Related Areas : Financial markets, Innovation, Joint ventures, Managing people, Reorganization

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Calculating Net Present Value (NPV) at 6% for Mazda Motor Corporation: Surviving by Partnering with the Giants Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016667)	-10016667	-	-
Year 1	3453893	-6562774	3453893	0.9434	3258390
Year 2	3960783	-2601991	7414676	0.89	3525083
Year 3	3951989	1349998	11366665	0.8396	3318166
Year 4	3222124	4572122	14588789	0.7921	2552224
TOTAL			14588789		12653863

The Net Present Value at 6% discount rate is 2637196

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. Net Present Value
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. Timing of the expected cash flows – stockholders of Mazda Motor 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. Mazda Motor 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 Mazda Motor Corporation: Surviving by Partnering with the Giants

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 Global Business 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 Mazda Motor 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 Mazda Motor 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	(10016667)	-10016667	-	-
Year 1	3453893	-6562774	3453893	0.8696	3003385
Year 2	3960783	-2601991	7414676	0.7561	2994921
Year 3	3951989	1349998	11366665	0.6575	2598497
Year 4	3222124	4572122	14588789	0.5718	1842260
TOTAL					10439063

The Net NPV after 4 years is 422396

(10439063 - 10016667 )

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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	(10016667)	-10016667	-	-
Year 1	3453893	-6562774	3453893	0.8333	2878244
Year 2	3960783	-2601991	7414676	0.6944	2750544
Year 3	3951989	1349998	11366665	0.5787	2287031
Year 4	3222124	4572122	14588789	0.4823	1553879
TOTAL					9469698

The Net NPV after 4 years is -546969

At 20% discount rate the NPV is negative (9469698 - 10016667 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mazda Motor 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 Mazda Motor has a NPV value higher than Zero then finance managers at Mazda Motor 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 Mazda Motor, then the stock price of the Mazda Motor 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 Mazda Motor 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 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 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.

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 Mazda Motor Corporation: Surviving by Partnering with the Giants

References & Further Readings

Wiboon Kittilaksanawong, Tae Kyung Lee, Andrew Jiro Poplawski (2018), "Mazda Motor Corporation: Surviving by Partnering with the Giants Harvard Business Review Case Study. Published by HBR Publications.