Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond 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 Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond case study is a Harvard Business School (HBR) case study written by Philip Zerrillo, Havovi Joshi. The Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond (referred as “Stationery Vietnam” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Growth 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

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Case Description of Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond Case Study

This case is set in 2017, when Co Gia Tho, Chairman of the Board at Thien Long Group Corporation ("TLG"), a Vietnam-based manufacturer and supplier of writing instruments and stationery products, is considering further international expansion. While Vietnam already had over 65,000 points of sale across the country, the company is looking to grow stronger by developing overseas markets. Founded in 1981 as a small family business manufacturing ball-point pens, TLG had grown to become the top stationery manufacturer in Vietnam and a market leader in the region. By end-2016, the company had a market capitalisation of approximately VND 4,000 billion (US$176 million), and total revenue of VND 2,162 billion (US$95 million). Its products were being distributed to more than 50 countries across six continents. Export revenues accounted for nearly 15% of the group's total revenue, and had been growing at over 30% year-on-year for the past three years. And yet, it continued to be a challenging proposition. What could Co do to enhance TLG's reach overseas? Moreover, given the global megatrend of rapid digitisation which was causing headwinds for the growth of physical office supplies in the more developed countries, how best could it adapt its strategy in the face of the changing dynamics of this almost commoditised and highly fragmented stationery industry?

Case Authors : Philip Zerrillo, Havovi Joshi

Topic : Sales & Marketing

Related Areas : Growth strategy

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Calculating Net Present Value (NPV) at 6% for Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027979)	-10027979	-	-
Year 1	3456298	-6571681	3456298	0.9434	3260658
Year 2	3963075	-2608606	7419373	0.89	3527123
Year 3	3953650	1345044	11373023	0.8396	3319561
Year 4	3250948	4595992	14623971	0.7921	2575055
TOTAL			14623971		12682397

The Net Present Value at 6% discount rate is 2654418

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. Timing of the expected cash flows – stockholders of Stationery Vietnam 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. Stationery Vietnam 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 Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond

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 Stationery Vietnam 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 Stationery Vietnam 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	(10027979)	-10027979	-	-
Year 1	3456298	-6571681	3456298	0.8696	3005477
Year 2	3963075	-2608606	7419373	0.7561	2996654
Year 3	3953650	1345044	11373023	0.6575	2599589
Year 4	3250948	4595992	14623971	0.5718	1858740
TOTAL					10460460

The Net NPV after 4 years is 432481

(10460460 - 10027979 )

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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	(10027979)	-10027979	-	-
Year 1	3456298	-6571681	3456298	0.8333	2880248
Year 2	3963075	-2608606	7419373	0.6944	2752135
Year 3	3953650	1345044	11373023	0.5787	2287992
Year 4	3250948	4595992	14623971	0.4823	1567780
TOTAL					9488155

The Net NPV after 4 years is -539824

At 20% discount rate the NPV is negative (9488155 - 10027979 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Stationery Vietnam 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 Stationery Vietnam has a NPV value higher than Zero then finance managers at Stationery Vietnam 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 Stationery Vietnam, then the stock price of the Stationery Vietnam 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 Stationery Vietnam 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 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond

References & Further Readings

Philip Zerrillo, Havovi Joshi (2018), "Thien Long Group Corporation: Stationery Success in Vietnam, Dynamic Ambition Beyond Harvard Business Review Case Study. Published by HBR Publications.