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Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead 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 Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead case study is a Harvard Business School (HBR) case study written by Vijay Vancheswar, DK Batra. The Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead (referred as “Wsds Teri” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, International business, Sustainability.

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 Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead Case Study


Founded in 1974, TERI (The Energy and Resources Institute) was an independent, not-for-profit research institute which focused on environment issues that affected Indian society and the world at large. TERI's mission was to develop innovative and sustainable interventions and cost-effective solutions that may be translated to action. TERI's competencies spanned the areas of training, outreach, research, and information. In keeping with its mission of being a knowledge-based agent of change, in June 2016, TERI decided to rechristen DSDS as World Sustainable Development Summit (WSDS). This was done to expand the profile of participants, increase its geographic reach and shift the location of the event, if required. It was also decided in 2016 to hold the annual event in October instead of February. The challenge confronting Dr. Verma was to come up with an effective event promotion strategy to enhance the WSDS' outreach program and generate significant revenues for TERI without compromising on the preferred choice of partners.


Case Authors : Vijay Vancheswar, DK Batra

Topic : Sales & Marketing

Related Areas : International business, Sustainability




Calculating Net Present Value (NPV) at 6% for Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10002634) -10002634 - -
Year 1 3462908 -6539726 3462908 0.9434 3266894
Year 2 3975828 -2563898 7438736 0.89 3538473
Year 3 3968107 1404209 11406843 0.8396 3331699
Year 4 3227639 4631848 14634482 0.7921 2556592
TOTAL 14634482 12693659


The Net Present Value at 6% discount rate is 2691025

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. Internal Rate of Return
2. Profitability Index
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 Wsds Teri 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. Wsds Teri 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 Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead

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 Sales & Marketing 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 Wsds Teri 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 Wsds Teri 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 (10002634) -10002634 - -
Year 1 3462908 -6539726 3462908 0.8696 3011224
Year 2 3975828 -2563898 7438736 0.7561 3006297
Year 3 3968107 1404209 11406843 0.6575 2609095
Year 4 3227639 4631848 14634482 0.5718 1845413
TOTAL 10472029


The Net NPV after 4 years is 469395

(10472029 - 10002634 )






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 (10002634) -10002634 - -
Year 1 3462908 -6539726 3462908 0.8333 2885757
Year 2 3975828 -2563898 7438736 0.6944 2760992
Year 3 3968107 1404209 11406843 0.5787 2296358
Year 4 3227639 4631848 14634482 0.4823 1556539
TOTAL 9499645


The Net NPV after 4 years is -502989

At 20% discount rate the NPV is negative (9499645 - 10002634 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Wsds Teri 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 Wsds Teri has a NPV value higher than Zero then finance managers at Wsds Teri 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 Wsds Teri, then the stock price of the Wsds Teri 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 Wsds Teri 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.




References & Further Readings

Vijay Vancheswar, DK Batra (2018), "Delhi/World Sustainable Development Summit (DSDS/WSDS): Rechristening It and the Path Ahead Harvard Business Review Case Study. Published by HBR Publications.