Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa 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 Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa case study is a Harvard Business School (HBR) case study written by Geoffrey G. Jones, Elliot R. Benton. The Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa (referred as “Engelhard Apartheid” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Ethics, Globalization, Government, Social responsibility.

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 Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa Case Study

This case considers the strategies of Charles W. Engelhard, an American mining magnate who made large investments in apartheid-era South Africa. Engelhard was widely believed to have been the model for the James Bond villan Auric Goldfinger. During the 1950s and 1960s Engelhard, who was well-connected with the leadership of the Democratic Party in the United States including President Lyndon B. Johnson, was one of the largest American investors in that country. His close relationship with Harry Oppenheimer, the head of the Anglo-American Corporation, gave him substantial influence within the South African business system. The case starts with anti-apartheid demonstrators protesting outside a ceremony awarding him a prize in Newark, New Jersey. It provides an opportunity to debate the political and ethical responsibilities of businesses in repressive regimes, and the challenges faced by entrepreneurs operating in countries with different value systems and political regimes.

Case Authors : Geoffrey G. Jones, Elliot R. Benton

Topic : Global Business

Related Areas : Ethics, Globalization, Government, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009250)	-10009250	-	-
Year 1	3461701	-6547549	3461701	0.9434	3265756
Year 2	3954785	-2592764	7416486	0.89	3519745
Year 3	3962359	1369595	11378845	0.8396	3326873
Year 4	3229126	4598721	14607971	0.7921	2557770
TOTAL			14607971		12670143

The Net Present Value at 6% discount rate is 2660893

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. 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 Engelhard Apartheid 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. Engelhard Apartheid 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 Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa

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 Global Business 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 Engelhard Apartheid 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 Engelhard Apartheid 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	(10009250)	-10009250	-	-
Year 1	3461701	-6547549	3461701	0.8696	3010175
Year 2	3954785	-2592764	7416486	0.7561	2990386
Year 3	3962359	1369595	11378845	0.6575	2605315
Year 4	3229126	4598721	14607971	0.5718	1846263
TOTAL					10452139

The Net NPV after 4 years is 442889

(10452139 - 10009250 )

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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	(10009250)	-10009250	-	-
Year 1	3461701	-6547549	3461701	0.8333	2884751
Year 2	3954785	-2592764	7416486	0.6944	2746378
Year 3	3962359	1369595	11378845	0.5787	2293032
Year 4	3229126	4598721	14607971	0.4823	1557256
TOTAL					9481417

The Net NPV after 4 years is -527833

At 20% discount rate the NPV is negative (9481417 - 10009250 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Engelhard Apartheid 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 Engelhard Apartheid has a NPV value higher than Zero then finance managers at Engelhard Apartheid 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 Engelhard Apartheid, then the stock price of the Engelhard Apartheid 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 Engelhard Apartheid 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 –

Understanding of risks involved in the project.

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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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

What can impact the cash flow of 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 Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa

References & Further Readings

Geoffrey G. Jones, Elliot R. Benton (2018), "Goldfinger: Charles W. Engelhard Jr. and Apartheid-era South Africa Harvard Business Review Case Study. Published by HBR Publications.