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The Cellphone Industry from the Origins to Deregulation, Industry Note 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 The Cellphone Industry from the Origins to Deregulation, Industry Note case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Cellphone Industry from the Origins to Deregulation, Industry Note case study is a Harvard Business School (HBR) case study written by Miguel Rivera-Santos, Carlos Rufin. The The Cellphone Industry from the Origins to Deregulation, Industry Note (referred as “Cameroon Note” 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






Case Description of The Cellphone Industry from the Origins to Deregulation, Industry Note 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




Calculating Net Present Value (NPV) at 6% for The Cellphone Industry from the Origins to Deregulation, Industry Note Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10017657) -10017657 - -
Year 1 3456293 -6561364 3456293 0.9434 3260654
Year 2 3980519 -2580845 7436812 0.89 3542648
Year 3 3974971 1394126 11411783 0.8396 3337462
Year 4 3238820 4632946 14650603 0.7921 2565449
TOTAL 14650603 12706213




The Net Present Value at 6% discount rate is 2688556

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. Profitability Index
4. Net Present Value

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 Cameroon Note 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. Cameroon Note 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 The Cellphone Industry from the Origins to Deregulation, Industry Note

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 Note 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 Note 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 (10017657) -10017657 - -
Year 1 3456293 -6561364 3456293 0.8696 3005472
Year 2 3980519 -2580845 7436812 0.7561 3009844
Year 3 3974971 1394126 11411783 0.6575 2613608
Year 4 3238820 4632946 14650603 0.5718 1851806
TOTAL 10480730


The Net NPV after 4 years is 463073

(10480730 - 10017657 )








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 (10017657) -10017657 - -
Year 1 3456293 -6561364 3456293 0.8333 2880244
Year 2 3980519 -2580845 7436812 0.6944 2764249
Year 3 3974971 1394126 11411783 0.5787 2300330
Year 4 3238820 4632946 14650603 0.4823 1561931
TOTAL 9506755


The Net NPV after 4 years is -510902

At 20% discount rate the NPV is negative (9506755 - 10017657 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Cameroon Note 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 Note has a NPV value higher than Zero then finance managers at Cameroon Note 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 Note, then the stock price of the Cameroon Note 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 Note 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 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.

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.

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 The Cellphone Industry from the Origins to Deregulation, Industry Note

References & Further Readings

Miguel Rivera-Santos, Carlos Rufin (2018), "The Cellphone Industry from the Origins to Deregulation, Industry Note Harvard Business Review Case Study. Published by HBR Publications.


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