An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan 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 An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan case study is a Harvard Business School (HBR) case study written by Veit Etzold. The An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan (referred as “Adc Sudan” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Economics, Emerging markets, Financial management, Globalization, Government, Managing uncertainty.

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 An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan Case Study

The case study documents the efforts of the African Development Corporation (ADC) and the Loita Group to acquire shares in Nile Commercial Bank (NCB) - the number one banking icon in South Sudan - and thus participate in the development of South Sudan as an independent, commodity-rich state. The case focuses on ADC's CEO, Dirk Harbecke, who in 2011 ran a fund that invests in banking and insurance services in sub-Saharan Africa. The case discusses whether or not ADC and Loita should invest in NCB. The real-world result of the case is ADC and Loita's eventual investment in the bank, as explained in the chapter "Restructuring the bank," which outlines the investment as it happens in real time in September 2011.

Case Authors : Veit Etzold

Topic : Finance & Accounting

Related Areas : Economics, Emerging markets, Financial management, Globalization, Government, Managing uncertainty

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Calculating Net Present Value (NPV) at 6% for An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10024051)	-10024051	-	-
Year 1	3445915	-6578136	3445915	0.9434	3250863
Year 2	3972212	-2605924	7418127	0.89	3535255
Year 3	3947849	1341925	11365976	0.8396	3314690
Year 4	3245939	4587864	14611915	0.7921	2571088
TOTAL			14611915		12671896

The Net Present Value at 6% discount rate is 2647845

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. Internal Rate of Return
3. Net Present Value
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 Adc Sudan 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. Adc Sudan 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 An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan

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 Finance & Accounting 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 Adc Sudan 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 Adc Sudan 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	(10024051)	-10024051	-	-
Year 1	3445915	-6578136	3445915	0.8696	2996448
Year 2	3972212	-2605924	7418127	0.7561	3003563
Year 3	3947849	1341925	11365976	0.6575	2595775
Year 4	3245939	4587864	14611915	0.5718	1855876
TOTAL					10451662

The Net NPV after 4 years is 427611

(10451662 - 10024051 )

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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	(10024051)	-10024051	-	-
Year 1	3445915	-6578136	3445915	0.8333	2871596
Year 2	3972212	-2605924	7418127	0.6944	2758481
Year 3	3947849	1341925	11365976	0.5787	2284635
Year 4	3245939	4587864	14611915	0.4823	1565364
TOTAL					9480075

The Net NPV after 4 years is -543976

At 20% discount rate the NPV is negative (9480075 - 10024051 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Adc Sudan 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 Adc Sudan has a NPV value higher than Zero then finance managers at Adc Sudan 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 Adc Sudan, then the stock price of the Adc Sudan 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 Adc Sudan 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 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.

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 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.

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Negotiation Strategy of An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan

References & Further Readings

Veit Etzold (2018), "An Old Bank in a New Country: Restructuring Nile Commercial Bank of South Sudan Harvard Business Review Case Study. Published by HBR Publications.