Kova: Becoming a Vietnamese Household Name in Paint 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 Kova: Becoming a Vietnamese Household Name in Paint case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Kova: Becoming a Vietnamese Household Name in Paint case study is a Harvard Business School (HBR) case study written by Philip Zerrillo, Adina Wong. The Kova: Becoming a Vietnamese Household Name in Paint (referred as “Kova Paint” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Emerging markets.

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 Kova: Becoming a Vietnamese Household Name in Paint Case Study

Set in 2016, this case follows Phua Koon Kee, the CEO of Kova Group, one of the largest paint manufacturers in Vietnam, as he pondered upon the business expansion strategy that could elevate the Kova brand's status to that of a household name. Based on a patented NANO technology that used silicates from rice husks to make paint, Kova's products were of higher quality than its competitors, in terms of environmental-friendliness, durability, waterproof properties and anti-fungal capability. Kova's distinct competitive advantage was its adaptation for the tropical climate and its localisation for geographical landscapes in Vietnam and other SE Asian Markets, which were the key reasons Kova was able to enjoy price premiums in its home market. Despite offering innovative and superior-quality products, Kova faced multiple challenges to growth. Domestically, as the Vietnamese economy opened up to the entry of foreign paint companies, competition in the paint industry has intensified. Kova wanted to grow the retail market, where the bulk of its revenue stream was derived, but channel distribution to numerous small stores and brand promotions to end-consumers would demand the company to come up with a well-crafted strategy. Internationally, Kova suffered from a lack of brand presence and a poor country-of-origin image. Given the multi-faceted challenges, Phua is left thinking about developing an effective integrated marketing plan to create a strong brand positioning for Kova. How could he then leverage the distinctiveness of the Kova brand to gain a larger local market share and subsequently conquer overseas markets?

Case Authors : Philip Zerrillo, Adina Wong

Topic : Sales & Marketing

Related Areas : Emerging markets

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Calculating Net Present Value (NPV) at 6% for Kova: Becoming a Vietnamese Household Name in Paint Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10004621)	-10004621	-	-
Year 1	3450863	-6553758	3450863	0.9434	3255531
Year 2	3978346	-2575412	7429209	0.89	3540714
Year 3	3955322	1379910	11384531	0.8396	3320965
Year 4	3227818	4607728	14612349	0.7921	2556734
TOTAL			14612349		12673944

The Net Present Value at 6% discount rate is 2669323

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. Profitability Index
2. Net Present Value
3. Internal Rate of Return
4. Payback Period

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. Kova Paint 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 Kova Paint 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 Kova: Becoming a Vietnamese Household Name in Paint

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 Kova Paint 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 Kova Paint 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	(10004621)	-10004621	-	-
Year 1	3450863	-6553758	3450863	0.8696	3000750
Year 2	3978346	-2575412	7429209	0.7561	3008201
Year 3	3955322	1379910	11384531	0.6575	2600688
Year 4	3227818	4607728	14612349	0.5718	1845515
TOTAL					10455155

The Net NPV after 4 years is 450534

(10455155 - 10004621 )

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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	(10004621)	-10004621	-	-
Year 1	3450863	-6553758	3450863	0.8333	2875719
Year 2	3978346	-2575412	7429209	0.6944	2762740
Year 3	3955322	1379910	11384531	0.5787	2288959
Year 4	3227818	4607728	14612349	0.4823	1556625
TOTAL					9484044

The Net NPV after 4 years is -520577

At 20% discount rate the NPV is negative (9484044 - 10004621 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Kova Paint 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 Kova Paint has a NPV value higher than Zero then finance managers at Kova Paint 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 Kova Paint, then the stock price of the Kova Paint 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 Kova Paint 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 will be a multi year spillover effect of various taxation regulations.

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.

Understanding of risks involved in the project.

What can impact the cash flow of 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 Kova: Becoming a Vietnamese Household Name in Paint

References & Further Readings

Philip Zerrillo, Adina Wong (2018), "Kova: Becoming a Vietnamese Household Name in Paint Harvard Business Review Case Study. Published by HBR Publications.