Orange Cameroon, A Global Telecommunications Company in 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 Orange Cameroon, A Global Telecommunications Company in Africa case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Orange Cameroon, A Global Telecommunications Company in Africa case study is a Harvard Business School (HBR) case study written by Miguel Rivera-Santos, Carlos Rufin. The Orange Cameroon, A Global Telecommunications Company in Africa (referred as “Cameroon Orange” 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, International business, 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 Orange Cameroon, A Global Telecommunications Company in Africa Case Study

This case series is designed to illustrate the specificities of competition in poor and developing economies and, more specifically, competition at the Base of the Pyramid. It is composed of four documents: two company cases, a country note, and an industry note. The company cases describe the competitive dynamics between two international telecom companies, Orange and MTN, in the Cameroonian telecom market. Each company case begins with a brief history of the company, followed by a description of the company's global strategy and of its entry into Cameroon. It goes on to describe the competitive dynamics in Cameroon from the company's perspective, and, particularly, the moves and counter-moves undertaken by each competitor to gain market share. Finally, the case describes the company's Corporate Social Responsibility initiatives, globally and in Cameroon. The case series also includes two background notes. The first note describes the evolution and the basic technical characteristics of the cell phone industry. The second note provides an introduction to the geography, history, and economy of Cameroon, with a particular focus on the socio-economic conditions of the country's population. Taken together, this case series allows a discussion of competition at the Base of the Pyramid, including both business and ethical aspects.

Case Authors : Miguel Rivera-Santos, Carlos Rufin

Topic : Global Business

Related Areas : Ethics, International business, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Orange Cameroon, A Global Telecommunications Company in Africa Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10004199)	-10004199	-	-
Year 1	3455370	-6548829	3455370	0.9434	3259783
Year 2	3977494	-2571335	7432864	0.89	3539956
Year 3	3950852	1379517	11383716	0.8396	3317212
Year 4	3222079	4601596	14605795	0.7921	2552188
TOTAL			14605795		12669138

The Net Present Value at 6% discount rate is 2664939

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. Profitability Index
3. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Cameroon Orange 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 Cameroon Orange 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 Orange Cameroon, A Global Telecommunications Company in 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 Cameroon Orange 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 Cameroon Orange 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	(10004199)	-10004199	-	-
Year 1	3455370	-6548829	3455370	0.8696	3004670
Year 2	3977494	-2571335	7432864	0.7561	3007557
Year 3	3950852	1379517	11383716	0.6575	2597749
Year 4	3222079	4601596	14605795	0.5718	1842234
TOTAL					10452210

The Net NPV after 4 years is 448011

(10452210 - 10004199 )

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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	(10004199)	-10004199	-	-
Year 1	3455370	-6548829	3455370	0.8333	2879475
Year 2	3977494	-2571335	7432864	0.6944	2762149
Year 3	3950852	1379517	11383716	0.5787	2286373
Year 4	3222079	4601596	14605795	0.4823	1553858
TOTAL					9481854

The Net NPV after 4 years is -522345

At 20% discount rate the NPV is negative (9481854 - 10004199 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Cameroon Orange 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 Cameroon Orange has a NPV value higher than Zero then finance managers at Cameroon Orange 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 Cameroon Orange, then the stock price of the Cameroon Orange 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 Cameroon Orange 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 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.

Understanding of risks involved in 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.

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 Orange Cameroon, A Global Telecommunications Company in Africa

References & Further Readings

Miguel Rivera-Santos, Carlos Rufin (2018), "Orange Cameroon, A Global Telecommunications Company in Africa Harvard Business Review Case Study. Published by HBR Publications.