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CapitaLand: Facing the Challenges Ahead 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 CapitaLand: Facing the Challenges Ahead case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. CapitaLand: Facing the Challenges Ahead case study is a Harvard Business School (HBR) case study written by Allen Morrison, Pallivathukkal Cherian Abraham. The CapitaLand: Facing the Challenges Ahead (referred as “Capitaland Singapore” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Growth strategy.

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 CapitaLand: Facing the Challenges Ahead Case Study


CapitaLand was Singapore's leading property developer. It was formed in 2000 though a merger between DBS Land (the property unit of Singapore's leading bank, DBS) and Pidemco Land, a Singapore government linked company. The Singapore government through Temasek Holdings (one of its sovereign wealth funds) held an equity stake of 40% at end-2011. Liew Mun Leong was the firm's first CEO from 2000 to 2012. CapitaLand decided to expand internationally because it felt that the Singapore market was saturated with limited growth opportunities. CapitaLand's initial focus was on a number of gateway cities, where it aimed to achieve critical mass. This strategy changed quickly with the new focus being on three core markets - Singapore, China and Australia. In expanding into new markets, CapitaLand began by sending out a high quality executive, who understood the firm and the way it operated, from headquarters to start the new unit up. The firm's objective was to transfer operational responsibility to local executives when this was possible. While it had made some progress in this regard, most senior executives - corporate officers and senior executives of business units - were still Singapore nationals.


Case Authors : Allen Morrison, Pallivathukkal Cherian Abraham

Topic : Global Business

Related Areas : Growth strategy




Calculating Net Present Value (NPV) at 6% for CapitaLand: Facing the Challenges Ahead Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10026992) -10026992 - -
Year 1 3466915 -6560077 3466915 0.9434 3270675
Year 2 3977365 -2582712 7444280 0.89 3539841
Year 3 3972105 1389393 11416385 0.8396 3335056
Year 4 3238209 4627602 14654594 0.7921 2564965
TOTAL 14654594 12710536




The Net Present Value at 6% discount rate is 2683544

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. Internal Rate of Return
2. Net Present Value
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 Capitaland Singapore 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. Capitaland Singapore 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 CapitaLand: Facing the Challenges Ahead

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 Capitaland Singapore 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 Capitaland Singapore 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 (10026992) -10026992 - -
Year 1 3466915 -6560077 3466915 0.8696 3014709
Year 2 3977365 -2582712 7444280 0.7561 3007459
Year 3 3972105 1389393 11416385 0.6575 2611724
Year 4 3238209 4627602 14654594 0.5718 1851457
TOTAL 10485348


The Net NPV after 4 years is 458356

(10485348 - 10026992 )








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 (10026992) -10026992 - -
Year 1 3466915 -6560077 3466915 0.8333 2889096
Year 2 3977365 -2582712 7444280 0.6944 2762059
Year 3 3972105 1389393 11416385 0.5787 2298672
Year 4 3238209 4627602 14654594 0.4823 1561636
TOTAL 9511463


The Net NPV after 4 years is -515529

At 20% discount rate the NPV is negative (9511463 - 10026992 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Capitaland Singapore 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 Capitaland Singapore has a NPV value higher than Zero then finance managers at Capitaland Singapore 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 Capitaland Singapore, then the stock price of the Capitaland Singapore 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 Capitaland Singapore 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 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 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 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.






Negotiation Strategy of CapitaLand: Facing the Challenges Ahead

References & Further Readings

Allen Morrison, Pallivathukkal Cherian Abraham (2018), "CapitaLand: Facing the Challenges Ahead Harvard Business Review Case Study. Published by HBR Publications.


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