×




Coca-Cola India's Frozen Dessert Plan Heats Up Competition 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 Coca-Cola India's Frozen Dessert Plan Heats Up Competition case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Coca-Cola India's Frozen Dessert Plan Heats Up Competition case study is a Harvard Business School (HBR) case study written by Sandeep Puri, Shreya Gupta, Archit Kacker. The Coca-Cola India's Frozen Dessert Plan Heats Up Competition (referred as “Coca Cola” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Marketing, Product development.

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 Coca-Cola India's Frozen Dessert Plan Heats Up Competition Case Study


In November 2017, Coca-Cola India Private Limited (Coca-Cola India) laid out a plan for the next summer-the introduction of a whipped frozen fruit dessert. Minute Maid Perfect Fruit, which Coca-Cola India planned to launch in India's top 10 cities in 2018, was to be an extension of the company's Minute Maid brand. Coca-Cola India also intended to expand Maaza, its fruit drink brand, with two new variants. These extensions were to be part of the company's strategy to launch a line of Beverage Plus products. Although globally, the parent company first began testing Perfect Fruit in Australia, the frozen dessert market in India would be the first to witness its full-scale launch. The company planned to launch the products at high foot-traffic retail outlets and popular locations for young people. If Coca-Cola India chose to make a foray into the frozen desserts segment, what strategic capabilities could it leverage? What possible obstacles to success could arise in the new product categories? What branding strategies could the company use to promote its products in this segment? Which market segments should the company target? What were the pros and cons of entering this segment? Most importantly, was it the right time to enter this market segment? Sandeep Puri is affiliated with Asian Institute of Management. Shreya Gupta is affiliated with Institute of Management Technology, Ghaziabad.


Case Authors : Sandeep Puri, Shreya Gupta, Archit Kacker

Topic : Sales & Marketing

Related Areas : Marketing, Product development




Calculating Net Present Value (NPV) at 6% for Coca-Cola India's Frozen Dessert Plan Heats Up Competition Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10015371) -10015371 - -
Year 1 3447679 -6567692 3447679 0.9434 3252527
Year 2 3960625 -2607067 7408304 0.89 3524942
Year 3 3964948 1357881 11373252 0.8396 3329047
Year 4 3246815 4604696 14620067 0.7921 2571782
TOTAL 14620067 12678298




The Net Present Value at 6% discount rate is 2662927

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. Payback Period
2. Net Present Value
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 Coca Cola 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. Coca Cola 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 Coca-Cola India's Frozen Dessert Plan Heats Up Competition

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 Coca Cola 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 Coca Cola 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 (10015371) -10015371 - -
Year 1 3447679 -6567692 3447679 0.8696 2997982
Year 2 3960625 -2607067 7408304 0.7561 2994802
Year 3 3964948 1357881 11373252 0.6575 2607018
Year 4 3246815 4604696 14620067 0.5718 1856377
TOTAL 10456178


The Net NPV after 4 years is 440807

(10456178 - 10015371 )








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 (10015371) -10015371 - -
Year 1 3447679 -6567692 3447679 0.8333 2873066
Year 2 3960625 -2607067 7408304 0.6944 2750434
Year 3 3964948 1357881 11373252 0.5787 2294530
Year 4 3246815 4604696 14620067 0.4823 1565787
TOTAL 9483817


The Net NPV after 4 years is -531554

At 20% discount rate the NPV is negative (9483817 - 10015371 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Coca Cola 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 Coca Cola has a NPV value higher than Zero then finance managers at Coca Cola 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 Coca Cola, then the stock price of the Coca Cola 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 Coca Cola 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 can impact the cash flow of the project.

Understanding of risks involved in 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.

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 Coca-Cola India's Frozen Dessert Plan Heats Up Competition

References & Further Readings

Sandeep Puri, Shreya Gupta, Archit Kacker (2018), "Coca-Cola India's Frozen Dessert Plan Heats Up Competition Harvard Business Review Case Study. Published by HBR Publications.


Cocoaland SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Food Processing


Zaigle Co SWOT Analysis / TOWS Matrix

Consumer Cyclical , Appliance & Tool


Nippon Kinzoku SWOT Analysis / TOWS Matrix

Basic Materials , Iron & Steel


Daiwa Motor Transport SWOT Analysis / TOWS Matrix

Transportation , Misc. Transportation


Cybele SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Food Processing


Shanghai Hile Bio Tech SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Swiber Holdings Ltd SWOT Analysis / TOWS Matrix

Energy , Oil Well Services & Equipment


The KEYW SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Invision AG SWOT Analysis / TOWS Matrix

Technology , Software & Programming


Logan Property Co SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services