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Seijing Motor Corporation: Reposition or Extend the Pickup Brand 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 Seijing Motor Corporation: Reposition or Extend the Pickup Brand case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Seijing Motor Corporation: Reposition or Extend the Pickup Brand case study is a Harvard Business School (HBR) case study written by Ashita Aggarwal Sharma, Shriram Iyer, Projesh Kar. The Seijing Motor Corporation: Reposition or Extend the Pickup Brand (referred as “Pickup Supreme” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Manufacturing.

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 Seijing Motor Corporation: Reposition or Extend the Pickup Brand Case Study


In early 2016, the country head for Seijing Motor Corporation (SMC) in India was worried about stagnant sales of the company's Supreme pickup brand. The Supreme brand had gained only a single-digit market share over the past year, and SMC's share of the growing large pickup market had steadily fallen, from 40 per cent in 2005 to 10 per cent in 2015. SMC's Supreme brand was competing with the market leader in the pickup segment. The pickup needed to be repositioned immediately so that it appealed to customers; otherwise, its market share would erode even further. Should the company fight existing consumer perceptions or leverage them? Should the Supreme brand be repositioned, or should SMC offer new brands in other segments? Should it extend the Supreme brand name into those other segments, or should it introduce new brand names? Ashita Aggarwal is affiliated with SP Jain Institute of Management & Research.


Case Authors : Ashita Aggarwal Sharma, Shriram Iyer, Projesh Kar

Topic : Sales & Marketing

Related Areas : Manufacturing




Calculating Net Present Value (NPV) at 6% for Seijing Motor Corporation: Reposition or Extend the Pickup Brand Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10007217) -10007217 - -
Year 1 3457569 -6549648 3457569 0.9434 3261858
Year 2 3967517 -2582131 7425086 0.89 3531076
Year 3 3950717 1368586 11375803 0.8396 3317098
Year 4 3241047 4609633 14616850 0.7921 2567213
TOTAL 14616850 12677245


The Net Present Value at 6% discount rate is 2670028

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. Net Present Value
2. Payback Period
3. Profitability Index
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 Pickup Supreme 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. Pickup Supreme 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 Seijing Motor Corporation: Reposition or Extend the Pickup Brand

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 Pickup Supreme 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 Pickup Supreme 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 (10007217) -10007217 - -
Year 1 3457569 -6549648 3457569 0.8696 3006582
Year 2 3967517 -2582131 7425086 0.7561 3000013
Year 3 3950717 1368586 11375803 0.6575 2597661
Year 4 3241047 4609633 14616850 0.5718 1853079
TOTAL 10457334


The Net NPV after 4 years is 450117

(10457334 - 10007217 )






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 (10007217) -10007217 - -
Year 1 3457569 -6549648 3457569 0.8333 2881308
Year 2 3967517 -2582131 7425086 0.6944 2755220
Year 3 3950717 1368586 11375803 0.5787 2286295
Year 4 3241047 4609633 14616850 0.4823 1563005
TOTAL 9485827


The Net NPV after 4 years is -521390

At 20% discount rate the NPV is negative (9485827 - 10007217 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Pickup Supreme 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 Pickup Supreme has a NPV value higher than Zero then finance managers at Pickup Supreme 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 Pickup Supreme, then the stock price of the Pickup Supreme 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 Pickup Supreme 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 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.

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

Ashita Aggarwal Sharma, Shriram Iyer, Projesh Kar (2018), "Seijing Motor Corporation: Reposition or Extend the Pickup Brand Harvard Business Review Case Study. Published by HBR Publications.