Puma's Challenge to Maintain Leadership in India 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 Puma's Challenge to Maintain Leadership in India case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Puma's Challenge to Maintain Leadership in India case study is a Harvard Business School (HBR) case study written by Sandeep Puri, Sanchita Krishna. The Puma's Challenge to Maintain Leadership in India (referred as “Puma Sportswear” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Emerging markets.

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 Puma's Challenge to Maintain Leadership in India Case Study

In 2015, Puma became the market leader in sportswear sales in India, leaving Adidas, Reebok, and Nike behind for the first time since Puma entered the market. Puma's success in India was primarily attributed to its marketing techniques, judicious expansion, and customer acquisition strategy. Indian consumers had been embracing lifestyle changes associated with increased health concerns and the popularity of fitness programs. As a result, the sportswear segment grew, presenting an opportunity for companies to maximize their return on investments. While Puma moved ahead of Adidas to become the leading sportswear brand in India, the market evolved and became competitive. Puma needed to continue innovating its marketing strategies to hold onto its leadership position. Meanwhile, domestic footwear brands were expanding their retail footprints and distribution networks beyond their regional presence in order to gain a substantial market share. Could Puma strengthen its branding and hold its market position despite continuing competition from established brands and new competition from domestic companies? Sandeep Puri is affiliated with Institute of Management Technology, Ghaziabad. Sanchita Krishna is affiliated with Institute of Management, Ghaziabad.

Case Authors : Sandeep Puri, Sanchita Krishna

Topic : Global Business

Related Areas : Emerging markets

Calculating Net Present Value (NPV) at 6% for Puma's Challenge to Maintain Leadership in India Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10001507) -10001507 - -
Year 1 3448108 -6553399 3448108 0.9434 3252932
Year 2 3982989 -2570410 7431097 0.89 3544846
Year 3 3950312 1379902 11381409 0.8396 3316758
Year 4 3244734 4624636 14626143 0.7921 2570133
TOTAL 14626143 12684669

The Net Present Value at 6% discount rate is 2683162

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. 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. Puma Sportswear 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 Puma Sportswear 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 Puma's Challenge to Maintain Leadership in India

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 Puma Sportswear 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 Puma Sportswear 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 %
Cash Flows
Year 0 (10001507) -10001507 - -
Year 1 3448108 -6553399 3448108 0.8696 2998355
Year 2 3982989 -2570410 7431097 0.7561 3011712
Year 3 3950312 1379902 11381409 0.6575 2597394
Year 4 3244734 4624636 14626143 0.5718 1855187
TOTAL 10462648

The Net NPV after 4 years is 461141

(10462648 - 10001507 )

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 %
Cash Flows
Year 0 (10001507) -10001507 - -
Year 1 3448108 -6553399 3448108 0.8333 2873423
Year 2 3982989 -2570410 7431097 0.6944 2765965
Year 3 3950312 1379902 11381409 0.5787 2286060
Year 4 3244734 4624636 14626143 0.4823 1564783
TOTAL 9490231

The Net NPV after 4 years is -511276

At 20% discount rate the NPV is negative (9490231 - 10001507 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Puma Sportswear 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 Puma Sportswear has a NPV value higher than Zero then finance managers at Puma Sportswear 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 Puma Sportswear, then the stock price of the Puma Sportswear 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 Puma Sportswear 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 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.

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

Understanding of risks involved in 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.

References & Further Readings

Sandeep Puri, Sanchita Krishna (2018), "Puma's Challenge to Maintain Leadership in India Harvard Business Review Case Study. Published by HBR Publications.