Antrix Corporation Limited: A strategy for the global market 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 Antrix Corporation Limited: A strategy for the global market case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Antrix Corporation Limited: A strategy for the global market case study is a Harvard Business School (HBR) case study written by C. Gopinath, L. Surendra. The Antrix Corporation Limited: A strategy for the global market (referred as “Antrix Satellites” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Corporate governance, Government, International business.

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 Antrix Corporation Limited: A strategy for the global market Case Study

Antrix is the marketing arm of the Indian government space agency. The company slowly established a track record for technical capability in the manufacture and launch of satellites, apart from supplying remote sensing data from its own satellites, for international clients. Seeing opportunities in the global commercial space industry, the company decided to set market share goals to pursue the segments of satellite manufacturing, satellite services and launch services globally. However, as a government-owned company that relies on a network of other government agencies for its manufacturing and services, it is not clear that the company has either picked its segments and goals carefully, or whether it has the organizational capabilities to deliver on its ambitions. The Managing Director is faced with the challenge of aligning organizational capabilities to take advantage of global opportunities.

Case Authors : C. Gopinath, L. Surendra

Topic : Global Business

Related Areas : Corporate governance, Government, International business

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Calculating Net Present Value (NPV) at 6% for Antrix Corporation Limited: A strategy for the global market Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016216)	-10016216	-	-
Year 1	3444305	-6571911	3444305	0.9434	3249344
Year 2	3955436	-2616475	7399741	0.89	3520324
Year 3	3943393	1326918	11343134	0.8396	3310949
Year 4	3239042	4565960	14582176	0.7921	2565625
TOTAL			14582176		12646242

The Net Present Value at 6% discount rate is 2630026

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. Profitability Index
2. Net Present Value
3. Internal Rate of Return
4. Payback Period

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 Antrix Satellites 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. Antrix Satellites 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 Antrix Corporation Limited: A strategy for the global market

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 Antrix Satellites 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 Antrix Satellites 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	(10016216)	-10016216	-	-
Year 1	3444305	-6571911	3444305	0.8696	2995048
Year 2	3955436	-2616475	7399741	0.7561	2990878
Year 3	3943393	1326918	11343134	0.6575	2592845
Year 4	3239042	4565960	14582176	0.5718	1851933
TOTAL					10430703

The Net NPV after 4 years is 414487

(10430703 - 10016216 )

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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	(10016216)	-10016216	-	-
Year 1	3444305	-6571911	3444305	0.8333	2870254
Year 2	3955436	-2616475	7399741	0.6944	2746831
Year 3	3943393	1326918	11343134	0.5787	2282056
Year 4	3239042	4565960	14582176	0.4823	1562038
TOTAL					9461179

The Net NPV after 4 years is -555037

At 20% discount rate the NPV is negative (9461179 - 10016216 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Antrix Satellites 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 Antrix Satellites has a NPV value higher than Zero then finance managers at Antrix Satellites 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 Antrix Satellites, then the stock price of the Antrix Satellites 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 Antrix Satellites 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 will be a multi year spillover effect of various taxation regulations.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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.

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 Antrix Corporation Limited: A strategy for the global market

References & Further Readings

C. Gopinath, L. Surendra (2018), "Antrix Corporation Limited: A strategy for the global market Harvard Business Review Case Study. Published by HBR Publications.