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Brand Activism 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 Brand Activism case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Brand Activism case study is a Harvard Business School (HBR) case study written by Bidhan L Parmar, Jeff Boichuk, Jenny Craddock. The Brand Activism (referred as “Activism Brand” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Public relations.

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 Brand Activism Case Study


This technical note offers students a definition of brand activism (as contrasted to corporate social responsibility) along with an explanation of the different forms that this corporate practice can take. Specifically, students are introduced to the concepts of both progressive and regressive brand activism, in addition to the different causes the activist efforts may champion, whether social, legal, or environmental, to name a few. In order to illustrate these different categories and the sensible ways for managers to approach brand activism, examples of both successful and unsuccessful brand activism initiatives are provided, including those of Benetton Group, Dove, Patagonia, and Pepsi. While these companies' moves were intentionally designed to resonate with consumers, students are also presented examples of companies that unwillingly elicited activist customer responses (including GrubHub, Uber, Nordstrom, Starbucks, and Papa John's). Finally, the examples of Jack Daniels and Chick-fil-A illustrate deliberate corporate decisions not to communicate their values, while an explanation of boycotting and buycotting helps students understand the impact that brand activism initiatives can have on the bottom line.


Case Authors : Bidhan L Parmar, Jeff Boichuk, Jenny Craddock

Topic : Sales & Marketing

Related Areas : Public relations




Calculating Net Present Value (NPV) at 6% for Brand Activism Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10007654) -10007654 - -
Year 1 3460601 -6547053 3460601 0.9434 3264718
Year 2 3963339 -2583714 7423940 0.89 3527358
Year 3 3950670 1366956 11374610 0.8396 3317059
Year 4 3235190 4602146 14609800 0.7921 2562573
TOTAL 14609800 12671708




The Net Present Value at 6% discount rate is 2664054

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. Profitability Index
2. Net Present Value
3. Payback Period
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 Activism Brand 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. Activism Brand 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 Brand Activism

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 Activism Brand 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 Activism Brand 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 (10007654) -10007654 - -
Year 1 3460601 -6547053 3460601 0.8696 3009218
Year 2 3963339 -2583714 7423940 0.7561 2996854
Year 3 3950670 1366956 11374610 0.6575 2597630
Year 4 3235190 4602146 14609800 0.5718 1849730
TOTAL 10453432


The Net NPV after 4 years is 445778

(10453432 - 10007654 )








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 (10007654) -10007654 - -
Year 1 3460601 -6547053 3460601 0.8333 2883834
Year 2 3963339 -2583714 7423940 0.6944 2752319
Year 3 3950670 1366956 11374610 0.5787 2286267
Year 4 3235190 4602146 14609800 0.4823 1560180
TOTAL 9482601


The Net NPV after 4 years is -525053

At 20% discount rate the NPV is negative (9482601 - 10007654 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Activism Brand 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 Activism Brand has a NPV value higher than Zero then finance managers at Activism Brand 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 Activism Brand, then the stock price of the Activism Brand 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 Activism Brand 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.

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.

What will be a multi year spillover effect of various taxation regulations.

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.






Negotiation Strategy of Brand Activism

References & Further Readings

Bidhan L Parmar, Jeff Boichuk, Jenny Craddock (2018), "Brand Activism Harvard Business Review Case Study. Published by HBR Publications.


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