Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting 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 Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting case study is a Harvard Business School (HBR) case study written by Pierre Chandon, Laura Heely, Fernando Machado. The Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting (referred as “Burger King” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Budgeting, Design, Entrepreneurial finance, Health, Public relations, Social platforms.

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 Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting Case Study

When 3G Capital bought Burger King from TPG, Bain Capital and Goldman in 2010, the fastfood chain was losing momentum. By 2014, the business was back in growth mode but the Burger King brand was still lacking lustre and it was unclear if the celebrity-heavy ad campaign would work. Could new CEO Daniel Schwartz and his team make the brand cool again - on the cheap? Drawing on data from a brand audit, the challenge is to (i) define the brand's identity and choose among five positioning ideas; (ii) allocate expenses between television, digital and PR, and brand and restaurant redesign. For the digital and PR components, for example, students have to evaluate eight mock-ups created by Burger King's agency, and come up with their own ideas for Burger King to evaluate. Please visit the https://cases.insead.edu/burger-king/ dedicated case website to access supplementary material.

Case Authors : Pierre Chandon, Laura Heely, Fernando Machado

Topic : Sales & Marketing

Related Areas : Budgeting, Design, Entrepreneurial finance, Health, Public relations, Social platforms

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Calculating Net Present Value (NPV) at 6% for Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10023152)	-10023152	-	-
Year 1	3459313	-6563839	3459313	0.9434	3263503
Year 2	3956312	-2607527	7415625	0.89	3521104
Year 3	3968581	1361054	11384206	0.8396	3332097
Year 4	3235709	4596763	14619915	0.7921	2562985
TOTAL			14619915		12679688

The Net Present Value at 6% discount rate is 2656536

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. Payback Period
3. Net Present Value
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. Timing of the expected cash flows – stockholders of Burger King 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. Burger King 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 Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting

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 Burger King 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 Burger King 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	(10023152)	-10023152	-	-
Year 1	3459313	-6563839	3459313	0.8696	3008098
Year 2	3956312	-2607527	7415625	0.7561	2991540
Year 3	3968581	1361054	11384206	0.6575	2609406
Year 4	3235709	4596763	14619915	0.5718	1850027
TOTAL					10459072

The Net NPV after 4 years is 435920

(10459072 - 10023152 )

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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	(10023152)	-10023152	-	-
Year 1	3459313	-6563839	3459313	0.8333	2882761
Year 2	3956312	-2607527	7415625	0.6944	2747439
Year 3	3968581	1361054	11384206	0.5787	2296633
Year 4	3235709	4596763	14619915	0.4823	1560431
TOTAL					9487263

The Net NPV after 4 years is -535889

At 20% discount rate the NPV is negative (9487263 - 10023152 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Burger King 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 Burger King has a NPV value higher than Zero then finance managers at Burger King 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 Burger King, then the stock price of the Burger King 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 Burger King 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 can impact the cash flow of the project.

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.

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 Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting

References & Further Readings

Pierre Chandon, Laura Heely, Fernando Machado (2018), "Can 3G Capital Make Burger King Cool Again? Brand Building Under Zero-Based Budgeting Harvard Business Review Case Study. Published by HBR Publications.