Universal Print Systems Limited: Exploring Operations Strategy Options 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 Universal Print Systems Limited: Exploring Operations Strategy Options case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Universal Print Systems Limited: Exploring Operations Strategy Options case study is a Harvard Business School (HBR) case study written by Sivakumar Alur. The Universal Print Systems Limited: Exploring Operations Strategy Options (referred as “Southern India” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, .

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 Universal Print Systems Limited: Exploring Operations Strategy Options Case Study

Universal Print Systems Limited, located in Southern India, provides self-adhesive label printing for such end-user businesses as the passenger car and alcoholic beverages industries. Although larger markets exist in Western and Northern India, 80 per cent of its customers are located in Southern India. Because of the company's low capacity utilization, management is contemplating its operations strategy options, including aggressively pursuing business in Southern India, expanding to Northern and/or Western India, sourcing online orders and digital printing, or exporting. Management is unsure of the best option to pursue. Sivakumar Alur is affiliated with T.A. Pai Management Institute.

Case Authors : Sivakumar Alur

Topic : Innovation & Entrepreneurship

Related Areas :

Calculating Net Present Value (NPV) at 6% for Universal Print Systems Limited: Exploring Operations Strategy Options Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10007185) -10007185 - -
Year 1 3456818 -6550367 3456818 0.9434 3261149
Year 2 3957375 -2592992 7414193 0.89 3522050
Year 3 3971593 1378601 11385786 0.8396 3334626
Year 4 3221918 4600519 14607704 0.7921 2552061
TOTAL 14607704 12669886

The Net Present Value at 6% discount rate is 2662701

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. Payback Period
2. Internal Rate of Return
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 Southern India 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. Southern India 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 Universal Print Systems Limited: Exploring Operations Strategy Options

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 Innovation & Entrepreneurship 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 Southern India 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 Southern India 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 (10007185) -10007185 - -
Year 1 3456818 -6550367 3456818 0.8696 3005929
Year 2 3957375 -2592992 7414193 0.7561 2992344
Year 3 3971593 1378601 11385786 0.6575 2611387
Year 4 3221918 4600519 14607704 0.5718 1842142
TOTAL 10451802

The Net NPV after 4 years is 444617

(10451802 - 10007185 )

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 (10007185) -10007185 - -
Year 1 3456818 -6550367 3456818 0.8333 2880682
Year 2 3957375 -2592992 7414193 0.6944 2748177
Year 3 3971593 1378601 11385786 0.5787 2298376
Year 4 3221918 4600519 14607704 0.4823 1553780
TOTAL 9481014

The Net NPV after 4 years is -526171

At 20% discount rate the NPV is negative (9481014 - 10007185 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Southern India 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 Southern India has a NPV value higher than Zero then finance managers at Southern India 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 Southern India, then the stock price of the Southern India 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 Southern India 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.

Understanding of risks involved in 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.

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

Sivakumar Alur (2018), "Universal Print Systems Limited: Exploring Operations Strategy Options Harvard Business Review Case Study. Published by HBR Publications.