Accor: Designing an Asset-Right Business and Disclosure Strategy 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 Accor: Designing an Asset-Right Business and Disclosure Strategy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Accor: Designing an Asset-Right Business and Disclosure Strategy case study is a Harvard Business School (HBR) case study written by Mozaffar Khan, George Serafeim. The Accor: Designing an Asset-Right Business and Disclosure Strategy (referred as “Accor Bazin” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, .

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 Accor: Designing an Asset-Right Business and Disclosure Strategy Case Study

Sebastien Bazin was now in charge of Accor, the world's largest French hotelier, a CAC 40 company with 3,600 hotels in 92 countries and a market cap of a‚¬10 billion. Previously as the European head of Colony Capital, one of the largest private equity groups and the largest shareholder of Accor, Bazin had since 2005 relentlessly pushed an asset-lite strategy from his perch on the Accor Board in the face of vigorous opposition from employees, senior management, and some Board members. Accor's stock price underperformance and the continuous fight over the strategic direction of the company had created turmoil and turnover in the C-suite and on the Board. After multiple CEO exits, and a failure by the Board to identify the next CEO in 2013, Bazin's offer to resign from Colony and assume the CEO position at Accor was met with incredulity from friends, alarm from Accor employees, and applause from the stock market. But would Bazin be able to deliver on his promises to investors and employees to pursue an asset-right strategy? Was an asset-heavy hotelier viable in today's economic environment? Could the market understand and appropriately value such a firm and what could be its disclosure strategy to ensure a fair valuation of the stock? How long would it be before he could deliver on his promises and show fruit from the restructuring?

Case Authors : Mozaffar Khan, George Serafeim

Topic : Finance & Accounting

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Accor: Designing an Asset-Right Business and Disclosure Strategy Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027013)	-10027013	-	-
Year 1	3456457	-6570556	3456457	0.9434	3260808
Year 2	3956999	-2613557	7413456	0.89	3521715
Year 3	3974723	1361166	11388179	0.8396	3337254
Year 4	3232786	4593952	14620965	0.7921	2560669
TOTAL			14620965		12680447

The Net Present Value at 6% discount rate is 2653434

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. Payback Period
3. Internal Rate of Return
4. Net Present Value

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 Accor Bazin 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. Accor Bazin 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 Accor: Designing an Asset-Right Business and Disclosure Strategy

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 Accor Bazin 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 Accor Bazin 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	(10027013)	-10027013	-	-
Year 1	3456457	-6570556	3456457	0.8696	3005615
Year 2	3956999	-2613557	7413456	0.7561	2992060
Year 3	3974723	1361166	11388179	0.6575	2613445
Year 4	3232786	4593952	14620965	0.5718	1848356
TOTAL					10459475

The Net NPV after 4 years is 432462

(10459475 - 10027013 )

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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	(10027013)	-10027013	-	-
Year 1	3456457	-6570556	3456457	0.8333	2880381
Year 2	3956999	-2613557	7413456	0.6944	2747916
Year 3	3974723	1361166	11388179	0.5787	2300187
Year 4	3232786	4593952	14620965	0.4823	1559021
TOTAL					9487505

The Net NPV after 4 years is -539508

At 20% discount rate the NPV is negative (9487505 - 10027013 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Accor Bazin 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 Accor Bazin has a NPV value higher than Zero then finance managers at Accor Bazin 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 Accor Bazin, then the stock price of the Accor Bazin 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 Accor Bazin 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 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.

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

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 Accor: Designing an Asset-Right Business and Disclosure Strategy

References & Further Readings

Mozaffar Khan, George Serafeim (2018), "Accor: Designing an Asset-Right Business and Disclosure Strategy Harvard Business Review Case Study. Published by HBR Publications.