Firm Strategies in a Changing Global Competitive Landscape 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 Firm Strategies in a Changing Global Competitive Landscape case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Firm Strategies in a Changing Global Competitive Landscape case study is a Harvard Business School (HBR) case study written by Michael A Hitt, Xiaoming He. The Firm Strategies in a Changing Global Competitive Landscape (referred as “Landscape Vibrantly” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Cross-cultural management, Globalization, Operations management.

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 Firm Strategies in a Changing Global Competitive Landscape Case Study

We can no longer discuss globalization in the future tense. Firms now operate in a global competitive landscape, one that is vibrantly dynamic and continuously changing. Herein, we examine this global landscape in its current form, and the changes we expect to occur over the next few decades. Based on these analyses, we identify firm strategies that are necessary to be successful in this challenging competitive landscape.

Case Authors : Michael A Hitt, Xiaoming He

Topic : Global Business

Related Areas : Cross-cultural management, Globalization, Operations management

Calculating Net Present Value (NPV) at 6% for Firm Strategies in a Changing Global Competitive Landscape Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10012492) -10012492 - -
Year 1 3460884 -6551608 3460884 0.9434 3264985
Year 2 3967190 -2584418 7428074 0.89 3530785
Year 3 3943679 1359261 11371753 0.8396 3311189
Year 4 3222256 4581517 14594009 0.7921 2552329
TOTAL 14594009 12659287

The Net Present Value at 6% discount rate is 2646795

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

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 Landscape Vibrantly 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. Landscape Vibrantly 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 Firm Strategies in a Changing Global Competitive Landscape

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 Landscape Vibrantly 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 Landscape Vibrantly 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 (10012492) -10012492 - -
Year 1 3460884 -6551608 3460884 0.8696 3009464
Year 2 3967190 -2584418 7428074 0.7561 2999766
Year 3 3943679 1359261 11371753 0.6575 2593033
Year 4 3222256 4581517 14594009 0.5718 1842335
TOTAL 10444598

The Net NPV after 4 years is 432106

(10444598 - 10012492 )

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 (10012492) -10012492 - -
Year 1 3460884 -6551608 3460884 0.8333 2884070
Year 2 3967190 -2584418 7428074 0.6944 2754993
Year 3 3943679 1359261 11371753 0.5787 2282222
Year 4 3222256 4581517 14594009 0.4823 1553943
TOTAL 9475228

The Net NPV after 4 years is -537264

At 20% discount rate the NPV is negative (9475228 - 10012492 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Landscape Vibrantly 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 Landscape Vibrantly has a NPV value higher than Zero then finance managers at Landscape Vibrantly 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 Landscape Vibrantly, then the stock price of the Landscape Vibrantly 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 Landscape Vibrantly 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 –

Understanding of risks involved in 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.

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.

References & Further Readings

Michael A Hitt, Xiaoming He (2018), "Firm Strategies in a Changing Global Competitive Landscape Harvard Business Review Case Study. Published by HBR Publications.