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BLC Bank and the Quest for Women's Empowerment in MENA 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 BLC Bank and the Quest for Women's Empowerment in MENA case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. BLC Bank and the Quest for Women's Empowerment in MENA case study is a Harvard Business School (HBR) case study written by Farah Matar, Dima Jamali. The BLC Bank and the Quest for Women's Empowerment in MENA (referred as “Blc Beirut” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Gender, 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 BLC Bank and the Quest for Women's Empowerment in MENA Case Study


In 2010, the assistant general manager and head of strategic development at Lebanon's BLC Bank attended the annual summit of the Global Banking Alliance for Women, a leading organization of financial institutions that drove the creation of women's wealth worldwide. On her return to Beirut, she encouraged her bank to capitalize on the inclusion of women as a relevant differentiator from both a business and societal perspective. The result of research into the economic, demographic and social needs of the country was the launch in 2012 of the "We Initiative", a unique and comprehensive program dedicated to the economic empowerment of women in the Middle East and North Africa region. By 2015, the program's success not only served the bank's economic bottom line but also benefited the Lebanese economy and community as a whole and exemplified the bank's sense of responsibility to its society. Farah Matar is affiliated with American University of Beirut. Dima Jamali is affiliated with American University of Beirut.


Case Authors : Farah Matar, Dima Jamali

Topic : Global Business

Related Areas : Gender, International business, Social responsibility




Calculating Net Present Value (NPV) at 6% for BLC Bank and the Quest for Women's Empowerment in MENA Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10013812) -10013812 - -
Year 1 3459375 -6554437 3459375 0.9434 3263561
Year 2 3953229 -2601208 7412604 0.89 3518360
Year 3 3948053 1346845 11360657 0.8396 3314861
Year 4 3249856 4596701 14610513 0.7921 2574190
TOTAL 14610513 12670973


The Net Present Value at 6% discount rate is 2657161

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. Blc Beirut 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 Blc Beirut 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 BLC Bank and the Quest for Women's Empowerment in MENA

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 Blc Beirut 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 Blc Beirut 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 (10013812) -10013812 - -
Year 1 3459375 -6554437 3459375 0.8696 3008152
Year 2 3953229 -2601208 7412604 0.7561 2989209
Year 3 3948053 1346845 11360657 0.6575 2595909
Year 4 3249856 4596701 14610513 0.5718 1858116
TOTAL 10451386


The Net NPV after 4 years is 437574

(10451386 - 10013812 )






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 (10013812) -10013812 - -
Year 1 3459375 -6554437 3459375 0.8333 2882813
Year 2 3953229 -2601208 7412604 0.6944 2745298
Year 3 3948053 1346845 11360657 0.5787 2284753
Year 4 3249856 4596701 14610513 0.4823 1567253
TOTAL 9480116


The Net NPV after 4 years is -533696

At 20% discount rate the NPV is negative (9480116 - 10013812 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Blc Beirut 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 Blc Beirut has a NPV value higher than Zero then finance managers at Blc Beirut 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 Blc Beirut, then the stock price of the Blc Beirut 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 Blc Beirut 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 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.

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

Farah Matar, Dima Jamali (2018), "BLC Bank and the Quest for Women's Empowerment in MENA Harvard Business Review Case Study. Published by HBR Publications.