A 'Glocalization' Approach to the Internationalization of Crisis Communication 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 A 'Glocalization' Approach to the Internationalization of Crisis Communication case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. A 'Glocalization' Approach to the Internationalization of Crisis Communication case study is a Harvard Business School (HBR) case study written by Derek Lehmberg, Jeff Hicks. The A 'Glocalization' Approach to the Internationalization of Crisis Communication (referred as “Glocalization Crisis” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Strategic planning, Supply chain.

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 A 'Glocalization' Approach to the Internationalization of Crisis Communication Case Study

This article focuses on the field of international crisis communication, whereby multinationals and their expatriate staff respond to crisis events in international and/or multicultural contexts. The field of international crisis communication is at or near a state of crisis due to lack of research and, more importantly, methods used by practitioners. 'Glocalization'-which is used successfully in fields as diverse as marketing, education, theology, and others as an effective and expedient way of leveraging global capabilities to meet local demands-is proposed as one method for addressing this need pragmatically. Using glocalization for the internationalizing of crisis communication benefits practitioners and researchers alike in a way that avoids imposing Western frameworks and interpretations onto non-Western crisis situations. We demonstrate the approach with a case study involving multinational McDonald's Corporation and its foreign subsidiary, McDonald's Japan.

Case Authors : Derek Lehmberg, Jeff Hicks

Topic : Global Business

Related Areas : Strategic planning, Supply chain

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Calculating Net Present Value (NPV) at 6% for A 'Glocalization' Approach to the Internationalization of Crisis Communication Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10012244)	-10012244	-	-
Year 1	3462128	-6550116	3462128	0.9434	3266158
Year 2	3974616	-2575500	7436744	0.89	3537394
Year 3	3946770	1371270	11383514	0.8396	3313784
Year 4	3241804	4613074	14625318	0.7921	2567812
TOTAL			14625318		12685149

The Net Present Value at 6% discount rate is 2672905

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. Payback Period
2. Net Present Value
3. Internal Rate of Return
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 Glocalization Crisis 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. Glocalization Crisis 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 A 'Glocalization' Approach to the Internationalization of Crisis Communication

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 Glocalization Crisis 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 Glocalization Crisis 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	(10012244)	-10012244	-	-
Year 1	3462128	-6550116	3462128	0.8696	3010546
Year 2	3974616	-2575500	7436744	0.7561	3005381
Year 3	3946770	1371270	11383514	0.6575	2595065
Year 4	3241804	4613074	14625318	0.5718	1853512
TOTAL					10464504

The Net NPV after 4 years is 452260

(10464504 - 10012244 )

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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	(10012244)	-10012244	-	-
Year 1	3462128	-6550116	3462128	0.8333	2885107
Year 2	3974616	-2575500	7436744	0.6944	2760150
Year 3	3946770	1371270	11383514	0.5787	2284010
Year 4	3241804	4613074	14625318	0.4823	1563370
TOTAL					9492637

The Net NPV after 4 years is -519607

At 20% discount rate the NPV is negative (9492637 - 10012244 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Glocalization Crisis 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 Glocalization Crisis has a NPV value higher than Zero then finance managers at Glocalization Crisis 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 Glocalization Crisis, then the stock price of the Glocalization Crisis 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 Glocalization Crisis 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 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.

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.

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Negotiation Strategy of A 'Glocalization' Approach to the Internationalization of Crisis Communication

References & Further Readings

Derek Lehmberg, Jeff Hicks (2018), "A 'Glocalization' Approach to the Internationalization of Crisis Communication Harvard Business Review Case Study. Published by HBR Publications.