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Hero MotoCorp: Championing a Cause 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 Hero MotoCorp: Championing a Cause case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Hero MotoCorp: Championing a Cause case study is a Harvard Business School (HBR) case study written by Utkarsh Majmudar, Namrata Rana. The Hero MotoCorp: Championing a Cause (referred as “Hmcl Campaign” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Personnel policies, Social responsibility, 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




Case Description of Hero MotoCorp: Championing a Cause Case Study


Hero MotoCorp Ltd. (HMCL) was the largest two-wheeler company in India, a country with one of the highest rates of road accidents in the world. HMCL realized that a cause marketing campaign around road safety could benefit the company in two ways-it could raise issues around road safety to benefit the greater society, and it could create a unique positioning for the company. HMCL created a multi-level campaign that created visibility and worked at the ground level to create behaviour change. HMCL's multi-level cause marketing campaign reached a large section of the population, but challenges lay ahead in measuring the success of the road safety campaign. The head of corporate social responsibility at the company had to determine how to measure the success of the campaign and whether to continue it. Utkarsh Majmudar is affiliated with Indian Institute of Management Udaipur.


Case Authors : Utkarsh Majmudar, Namrata Rana

Topic : Sales & Marketing

Related Areas : Personnel policies, Social responsibility, Strategy




Calculating Net Present Value (NPV) at 6% for Hero MotoCorp: Championing a Cause Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10003866) -10003866 - -
Year 1 3456251 -6547615 3456251 0.9434 3260614
Year 2 3973264 -2574351 7429515 0.89 3536191
Year 3 3959300 1384949 11388815 0.8396 3324305
Year 4 3237987 4622936 14626802 0.7921 2564789
TOTAL 14626802 12685899


The Net Present Value at 6% discount rate is 2682033

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. Net Present Value
3. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Hmcl Campaign 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 Hmcl Campaign 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 Hero MotoCorp: Championing a Cause

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 Hmcl Campaign 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 Hmcl Campaign 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 (10003866) -10003866 - -
Year 1 3456251 -6547615 3456251 0.8696 3005436
Year 2 3973264 -2574351 7429515 0.7561 3004358
Year 3 3959300 1384949 11388815 0.6575 2603304
Year 4 3237987 4622936 14626802 0.5718 1851330
TOTAL 10464428


The Net NPV after 4 years is 460562

(10464428 - 10003866 )






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 (10003866) -10003866 - -
Year 1 3456251 -6547615 3456251 0.8333 2880209
Year 2 3973264 -2574351 7429515 0.6944 2759211
Year 3 3959300 1384949 11388815 0.5787 2291262
Year 4 3237987 4622936 14626802 0.4823 1561529
TOTAL 9492211


The Net NPV after 4 years is -511655

At 20% discount rate the NPV is negative (9492211 - 10003866 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Hmcl Campaign 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 Hmcl Campaign has a NPV value higher than Zero then finance managers at Hmcl Campaign 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 Hmcl Campaign, then the stock price of the Hmcl Campaign 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 Hmcl Campaign 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 can impact the cash flow of the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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

Utkarsh Majmudar, Namrata Rana (2018), "Hero MotoCorp: Championing a Cause Harvard Business Review Case Study. Published by HBR Publications.