Coca-Cola Zero Sugar: The Value Cycle During a Relaunch 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 Coca-Cola Zero Sugar: The Value Cycle During a Relaunch case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Coca-Cola Zero Sugar: The Value Cycle During a Relaunch case study is a Harvard Business School (HBR) case study written by Gaganpreet Singh, Sandeep Puri, Sharad Sarin. The Coca-Cola Zero Sugar: The Value Cycle During a Relaunch (referred as “Coca Cola” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Manufacturing, Pricing.

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 Coca-Cola Zero Sugar: The Value Cycle During a Relaunch Case Study

A 2016 consumer survey in the United Kingdom revealed that five out of 10 people did not know that Coca-Cola Zero (Coke Zero) contained no sugar. Many respondents also expected Coke Zero to taste more like Coca-Cola Classic, but found the taste not similar enough. Therefore, Coca-Cola relaunched the product with an ambitious multimillion-dollar marketing campaign that followed a three-dimension value management cycle encompassing value creation, value communication, and value capture. To successfully relaunch Coke Zero and achieve the company's objectives, Coca-Cola would need to both anticipate the challenges in each of these three phases and manage them effectively. Gaganpreet Singh is affiliated with National Institute of Industrial Engineering. Sandeep Puri is affiliated with Institute of Management Technology, Ghaziabad. Sharad Sarin is affiliated with XLRI-Xavier School of Management.

Case Authors : Gaganpreet Singh, Sandeep Puri, Sharad Sarin

Topic : Global Business

Related Areas : Manufacturing, Pricing

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Calculating Net Present Value (NPV) at 6% for Coca-Cola Zero Sugar: The Value Cycle During a Relaunch Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10023918)	-10023918	-	-
Year 1	3472292	-6551626	3472292	0.9434	3275747
Year 2	3967372	-2584254	7439664	0.89	3530947
Year 3	3951364	1367110	11391028	0.8396	3317641
Year 4	3249377	4616487	14640405	0.7921	2573811
TOTAL			14640405		12698146

The Net Present Value at 6% discount rate is 2674228

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. Payback Period
2. Net Present Value
3. Profitability Index
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. Timing of the expected cash flows – stockholders of Coca Cola 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. Coca Cola shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Coca-Cola Zero Sugar: The Value Cycle During a Relaunch

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 Coca Cola 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 Coca Cola 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	(10023918)	-10023918	-	-
Year 1	3472292	-6551626	3472292	0.8696	3019384
Year 2	3967372	-2584254	7439664	0.7561	2999903
Year 3	3951364	1367110	11391028	0.6575	2598086
Year 4	3249377	4616487	14640405	0.5718	1857842
TOTAL					10475215

The Net NPV after 4 years is 451297

(10475215 - 10023918 )

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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	(10023918)	-10023918	-	-
Year 1	3472292	-6551626	3472292	0.8333	2893577
Year 2	3967372	-2584254	7439664	0.6944	2755119
Year 3	3951364	1367110	11391028	0.5787	2286669
Year 4	3249377	4616487	14640405	0.4823	1567022
TOTAL					9502387

The Net NPV after 4 years is -521531

At 20% discount rate the NPV is negative (9502387 - 10023918 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Coca Cola 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 Coca Cola has a NPV value higher than Zero then finance managers at Coca Cola 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 Coca Cola, then the stock price of the Coca Cola 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 Coca Cola 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 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 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.

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Negotiation Strategy of Coca-Cola Zero Sugar: The Value Cycle During a Relaunch

References & Further Readings

Gaganpreet Singh, Sandeep Puri, Sharad Sarin (2018), "Coca-Cola Zero Sugar: The Value Cycle During a Relaunch Harvard Business Review Case Study. Published by HBR Publications.