Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities 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 Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities case study is a Harvard Business School (HBR) case study written by Joseph C. Marques, Anna Lupina-Wegener, Susan Schneider. The Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities (referred as “Emerging Internationalization” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Emerging markets, 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

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Case Description of Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities Case Study

The greatly improved economic fundamentals of the major emerging economies over the last decade have propelled several emerging banks into the ranks of the world's largest. Despite their importance in the global economy, the internationalization of emerging market banks remains an understudied phenomenon. This article examines factors that may influence the internationalization strategies of emerging market banks in the private banking sector, both when going abroad (take-off) and upon arrival in a host country (landing). The private banking sector is of significant interest given its importance in many leading financial centers around the world while undergoing major transformation due to the worldwide financial crisis, several recent scandals, and a fast-changing regulatory environment. We highlight the internationalization strategies of two banks from emerging countries, China and Brazil, and their experience in Switzerland's traditional private banking sector. These two cases highlight factors that may influence successful internationalization such as prior industry experience, existing client base, entry strategy, ownership type, and the liability of foreignness. Our findings offer valuable implications for managers from other emerging economies by providing a better understanding of how emerging market banks expand internationally.

Case Authors : Joseph C. Marques, Anna Lupina-Wegener, Susan Schneider

Topic : Global Business

Related Areas : Emerging markets, Strategy

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Calculating Net Present Value (NPV) at 6% for Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10002917)	-10002917	-	-
Year 1	3456194	-6546723	3456194	0.9434	3260560
Year 2	3964413	-2582310	7420607	0.89	3528313
Year 3	3975353	1393043	11395960	0.8396	3337783
Year 4	3230603	4623646	14626563	0.7921	2558940
TOTAL			14626563		12685597

The Net Present Value at 6% discount rate is 2682680

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

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. Emerging Internationalization 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 Emerging Internationalization have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities

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 Emerging Internationalization 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 Emerging Internationalization 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	(10002917)	-10002917	-	-
Year 1	3456194	-6546723	3456194	0.8696	3005386
Year 2	3964413	-2582310	7420607	0.7561	2997666
Year 3	3975353	1393043	11395960	0.6575	2613859
Year 4	3230603	4623646	14626563	0.5718	1847108
TOTAL					10464019

The Net NPV after 4 years is 461102

(10464019 - 10002917 )

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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	(10002917)	-10002917	-	-
Year 1	3456194	-6546723	3456194	0.8333	2880162
Year 2	3964413	-2582310	7420607	0.6944	2753065
Year 3	3975353	1393043	11395960	0.5787	2300552
Year 4	3230603	4623646	14626563	0.4823	1557968
TOTAL					9491746

The Net NPV after 4 years is -511171

At 20% discount rate the NPV is negative (9491746 - 10002917 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Emerging Internationalization 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 Emerging Internationalization has a NPV value higher than Zero then finance managers at Emerging Internationalization 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 Emerging Internationalization, then the stock price of the Emerging Internationalization 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 Emerging Internationalization 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 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.

What can impact the cash flow of the project.

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 Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities

References & Further Readings

Joseph C. Marques, Anna Lupina-Wegener, Susan Schneider (2018), "Internationalization Strategies of Emerging Market Banks: Challenges and Opportunities Harvard Business Review Case Study. Published by HBR Publications.