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Office Design Partners (Thailand) Ltd. 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 Office Design Partners (Thailand) Ltd. case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Office Design Partners (Thailand) Ltd. case study is a Harvard Business School (HBR) case study written by Joseph J. Distefano, Tom Gleave. The Office Design Partners (Thailand) Ltd. (referred as “Thailand Taiwan” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Joint ventures, Leadership, Operations management.

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 Office Design Partners (Thailand) Ltd. Case Study


The managing director and operations director of the Thailand manufacturing arm of a Taiwan-Thailand joint venture (JV) were experiencing severe difficulties. Transferred to Thailand from Taiwan three years ago, they shared management responsibilities with other Taiwanese expatriates, two North Americans, and a few Thai supervisors. The workforce was predominately local Thais. The performance of the company was not meeting the expectations of either of the JV partners, a problem especially acute for the managing director, whose father was chairman of the Taiwan partner's holding company. Problems included high turnover, changing roles with the recent departure of the American firm originally in a 3-way partnership, intercultural communications, and general confusion as to what to do. The purpose of the case is to develop a process for defining the problems and planning appropriate action in a complex international milieu.


Case Authors : Joseph J. Distefano, Tom Gleave

Topic : Global Business

Related Areas : Joint ventures, Leadership, Operations management




Calculating Net Present Value (NPV) at 6% for Office Design Partners (Thailand) Ltd. Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10021072) -10021072 - -
Year 1 3448725 -6572347 3448725 0.9434 3253514
Year 2 3975382 -2596965 7424107 0.89 3538076
Year 3 3965425 1368460 11389532 0.8396 3329447
Year 4 3249137 4617597 14638669 0.7921 2573621
TOTAL 14638669 12694658




The Net Present Value at 6% discount rate is 2673586

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. Payback Period
2. Internal Rate of Return
3. Net Present Value
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Thailand Taiwan 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 Thailand Taiwan have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Office Design Partners (Thailand) Ltd.

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 Thailand Taiwan 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 Thailand Taiwan 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 (10021072) -10021072 - -
Year 1 3448725 -6572347 3448725 0.8696 2998891
Year 2 3975382 -2596965 7424107 0.7561 3005960
Year 3 3965425 1368460 11389532 0.6575 2607331
Year 4 3249137 4617597 14638669 0.5718 1857705
TOTAL 10469887


The Net NPV after 4 years is 448815

(10469887 - 10021072 )








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 (10021072) -10021072 - -
Year 1 3448725 -6572347 3448725 0.8333 2873938
Year 2 3975382 -2596965 7424107 0.6944 2760682
Year 3 3965425 1368460 11389532 0.5787 2294806
Year 4 3249137 4617597 14638669 0.4823 1566906
TOTAL 9496332


The Net NPV after 4 years is -524740

At 20% discount rate the NPV is negative (9496332 - 10021072 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Thailand Taiwan 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 Thailand Taiwan has a NPV value higher than Zero then finance managers at Thailand Taiwan 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 Thailand Taiwan, then the stock price of the Thailand Taiwan 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 Thailand Taiwan 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 Office Design Partners (Thailand) Ltd.

References & Further Readings

Joseph J. Distefano, Tom Gleave (2018), "Office Design Partners (Thailand) Ltd. Harvard Business Review Case Study. Published by HBR Publications.


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