×




Sony Corp.: The Walkman Line 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 Sony Corp.: The Walkman Line case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Sony Corp.: The Walkman Line case study is a Harvard Business School (HBR) case study written by Robin Cooper. The Sony Corp.: The Walkman Line (referred as “Walkman Sony” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Branding, Costs, Pricing.

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 Sony Corp.: The Walkman Line Case Study


Explores how Sony manages its Walkman line in both the domestic (Japanese) and Western markets. Describes a simple target costing system, a simple Japanese cost accounting system, and the management of product proliferation.


Case Authors : Robin Cooper

Topic : Finance & Accounting

Related Areas : Branding, Costs, Pricing




Calculating Net Present Value (NPV) at 6% for Sony Corp.: The Walkman Line Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10025422) -10025422 - -
Year 1 3464037 -6561385 3464037 0.9434 3267959
Year 2 3963492 -2597893 7427529 0.89 3527494
Year 3 3938115 1340222 11365644 0.8396 3306517
Year 4 3232461 4572683 14598105 0.7921 2560412
TOTAL 14598105 12662382




The Net Present Value at 6% discount rate is 2636960

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. Internal Rate of Return
3. Payback Period
4. Profitability Index

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 Walkman Sony 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. Walkman Sony 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 Sony Corp.: The Walkman Line

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 Walkman Sony 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 Walkman Sony 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 (10025422) -10025422 - -
Year 1 3464037 -6561385 3464037 0.8696 3012206
Year 2 3963492 -2597893 7427529 0.7561 2996969
Year 3 3938115 1340222 11365644 0.6575 2589375
Year 4 3232461 4572683 14598105 0.5718 1848170
TOTAL 10446720


The Net NPV after 4 years is 421298

(10446720 - 10025422 )








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 (10025422) -10025422 - -
Year 1 3464037 -6561385 3464037 0.8333 2886698
Year 2 3963492 -2597893 7427529 0.6944 2752425
Year 3 3938115 1340222 11365644 0.5787 2279002
Year 4 3232461 4572683 14598105 0.4823 1558864
TOTAL 9476989


The Net NPV after 4 years is -548433

At 20% discount rate the NPV is negative (9476989 - 10025422 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Walkman Sony 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 Walkman Sony has a NPV value higher than Zero then finance managers at Walkman Sony 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 Walkman Sony, then the stock price of the Walkman Sony 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 Walkman Sony 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 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.

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 Sony Corp.: The Walkman Line

References & Further Readings

Robin Cooper (2018), "Sony Corp.: The Walkman Line Harvard Business Review Case Study. Published by HBR Publications.


George Kent SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Phileo Australia Ltd SWOT Analysis / TOWS Matrix

Services , Real Estate Operations


B&D Life Health SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Personal & Household Prods.


Hermes International SWOT Analysis / TOWS Matrix

Consumer Cyclical , Apparel/Accessories


Komori Corp SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods


Chungkwang Construction SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Ni Steel SWOT Analysis / TOWS Matrix

Basic Materials , Misc. Fabricated Products


Duckshin Housing SWOT Analysis / TOWS Matrix

Capital Goods , Constr. - Supplies & Fixtures


Shenzhen Sinexcel Electric SWOT Analysis / TOWS Matrix

Technology , Electronic Instr. & Controls