×




Shaw Communications: Becoming a Connectivity Pure Play? 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 Shaw Communications: Becoming a Connectivity Pure Play? case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Shaw Communications: Becoming a Connectivity Pure Play? case study is a Harvard Business School (HBR) case study written by Rod E. White, W. Glenn Rowe, Jeremiah De Sousa. The Shaw Communications: Becoming a Connectivity Pure Play? (referred as “Shaw Communications” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Risk management.

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 Shaw Communications: Becoming a Connectivity Pure Play? Case Study


In late 2015, the chief executive officer of Shaw Communications was considering whether to reduce or divest the company's media assets. Shaw Communications had been founded as a cable television provider and, over the years, had grown its consumer connectivity businesses to include Internet services, satellite television, landline telephony, and, most recently, cellular network services. Similar to most other major Canadian telecommunications companies, Shaw Communications had acquired media assets, including the Global Television Network and specialty channels such as History and Treehouse. Selling all or, some, of these media assets would strengthen the company's balance sheet and help finance the expansion of its cellular network. The company's chief executive officer needed decide how important media assets were to the company's core strategy.


Case Authors : Rod E. White, W. Glenn Rowe, Jeremiah De Sousa

Topic : Leadership & Managing People

Related Areas : Risk management




Calculating Net Present Value (NPV) at 6% for Shaw Communications: Becoming a Connectivity Pure Play? Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10027025) -10027025 - -
Year 1 3447673 -6579352 3447673 0.9434 3252522
Year 2 3980280 -2599072 7427953 0.89 3542435
Year 3 3938301 1339229 11366254 0.8396 3306673
Year 4 3251504 4590733 14617758 0.7921 2575496
TOTAL 14617758 12677126




The Net Present Value at 6% discount rate is 2650101

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. Payback Period
2. Internal Rate of Return
3. Profitability Index
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Shaw Communications 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 Shaw Communications have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Shaw Communications: Becoming a Connectivity Pure Play?

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 Leadership & Managing People 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 Shaw Communications 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 Shaw Communications 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 (10027025) -10027025 - -
Year 1 3447673 -6579352 3447673 0.8696 2997977
Year 2 3980280 -2599072 7427953 0.7561 3009664
Year 3 3938301 1339229 11366254 0.6575 2589497
Year 4 3251504 4590733 14617758 0.5718 1859058
TOTAL 10456195


The Net NPV after 4 years is 429170

(10456195 - 10027025 )








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 (10027025) -10027025 - -
Year 1 3447673 -6579352 3447673 0.8333 2873061
Year 2 3980280 -2599072 7427953 0.6944 2764083
Year 3 3938301 1339229 11366254 0.5787 2279109
Year 4 3251504 4590733 14617758 0.4823 1568048
TOTAL 9484301


The Net NPV after 4 years is -542724

At 20% discount rate the NPV is negative (9484301 - 10027025 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Shaw Communications 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 Shaw Communications has a NPV value higher than Zero then finance managers at Shaw Communications 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 Shaw Communications, then the stock price of the Shaw Communications 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 Shaw Communications 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 –

Understanding of risks involved in the project.

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.

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.






Negotiation Strategy of Shaw Communications: Becoming a Connectivity Pure Play?

References & Further Readings

Rod E. White, W. Glenn Rowe, Jeremiah De Sousa (2018), "Shaw Communications: Becoming a Connectivity Pure Play? Harvard Business Review Case Study. Published by HBR Publications.


Accelink Tech A SWOT Analysis / TOWS Matrix

Technology , Communications Equipment


Taiji Computer A SWOT Analysis / TOWS Matrix

Technology , Computer Services


Agios Pharm SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Olin SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


Daiwa SWOT Analysis / TOWS Matrix

Services , Retail (Department & Discount)


eBay SWOT Analysis / TOWS Matrix

Services , Retail (Catalog & Mail Order)


TI Financial SWOT Analysis / TOWS Matrix

Financial , Consumer Financial Services