Bankruptcy and Restructuring at Marvel Entertainment Group 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 Bankruptcy and Restructuring at Marvel Entertainment Group case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Bankruptcy and Restructuring at Marvel Entertainment Group case study is a Harvard Business School (HBR) case study written by Benjamin C. Esty, Jason S. Auerbach. The Bankruptcy and Restructuring at Marvel Entertainment Group (referred as “Marvel Hearing” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Costs, Decision making, Financial analysis, Reorganization, Strategic planning.

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 Bankruptcy and Restructuring at Marvel Entertainment Group Case Study

Marvel Entertainment Group is the leading comic book publisher in the United States, with superheros like Spider-Man, the Incredible Hulk, the X-Men, and Captain America. It is also one of the leading manufacturers of sports and entertainment trading cards under the Fleer and Sky Box brand names. In the mid-1990s, it experienced sharp declines in both businesses, causing it to file for bankruptcy in December 1996. This case is set in late January 1997, shortly after Marvel filed its reorganization plan with the bankruptcy court and approximately one month before creditors will have to vote on the plan at the confirmation hearing. Two of the most prominent corporate raiders of the 1980s are pitted against each other for control of the company. On one side is Ronald Perelman, who controls Marvel through his MacAndrews & Forbes holding company. On the other side is Carl Icahn, who controls 25% of Marvel's public debt. Icahn and the other bondholders must decide whether to accept Perelman's plan, to reject it in favor of their own plan, or to sell their bonds before the confirmation hearing. Perelman must decide whether to change the plan in response to the debtholders' threats or to wait and see what happens at the hearing. A rewritten version of another case.

Case Authors : Benjamin C. Esty, Jason S. Auerbach

Topic : Finance & Accounting

Related Areas : Costs, Decision making, Financial analysis, Reorganization, Strategic planning

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Calculating Net Present Value (NPV) at 6% for Bankruptcy and Restructuring at Marvel Entertainment Group Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020347)	-10020347	-	-
Year 1	3459876	-6560471	3459876	0.9434	3264034
Year 2	3961487	-2598984	7421363	0.89	3525709
Year 3	3938095	1339111	11359458	0.8396	3306501
Year 4	3234293	4573404	14593751	0.7921	2561863
TOTAL			14593751		12658107

The Net Present Value at 6% discount rate is 2637760

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. Net Present Value
2. Internal Rate of Return
3. Profitability Index
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Marvel Hearing shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Marvel Hearing have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Bankruptcy and Restructuring at Marvel Entertainment Group

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 Marvel Hearing 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 Marvel Hearing 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	(10020347)	-10020347	-	-
Year 1	3459876	-6560471	3459876	0.8696	3008588
Year 2	3961487	-2598984	7421363	0.7561	2995453
Year 3	3938095	1339111	11359458	0.6575	2589361
Year 4	3234293	4573404	14593751	0.5718	1849218
TOTAL					10442620

The Net NPV after 4 years is 422273

(10442620 - 10020347 )

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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	(10020347)	-10020347	-	-
Year 1	3459876	-6560471	3459876	0.8333	2883230
Year 2	3961487	-2598984	7421363	0.6944	2751033
Year 3	3938095	1339111	11359458	0.5787	2278990
Year 4	3234293	4573404	14593751	0.4823	1559748
TOTAL					9473001

The Net NPV after 4 years is -547346

At 20% discount rate the NPV is negative (9473001 - 10020347 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Marvel Hearing 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 Marvel Hearing has a NPV value higher than Zero then finance managers at Marvel Hearing 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 Marvel Hearing, then the stock price of the Marvel Hearing 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 Marvel Hearing 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.

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.

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 Bankruptcy and Restructuring at Marvel Entertainment Group

References & Further Readings

Benjamin C. Esty, Jason S. Auerbach (2018), "Bankruptcy and Restructuring at Marvel Entertainment Group Harvard Business Review Case Study. Published by HBR Publications.