Estimating Demand in Emerging Markets for Kodak Express 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 Estimating Demand in Emerging Markets for Kodak Express case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Estimating Demand in Emerging Markets for Kodak Express case study is a Harvard Business School (HBR) case study written by David Currie, Ilan Alon. The Estimating Demand in Emerging Markets for Kodak Express (referred as “Kodak Express” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Economics, Emerging markets, Marketing.

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 Estimating Demand in Emerging Markets for Kodak Express Case Study

This case concerns an executive who must estimate the demand for Kodak Express outlets in various developing countries based on socioeconomic and demographic data about the countries. The case requires students to think about how to transform data on a national scale (GDP per capita, population, income distribution) into a form that is meaningful for a managerial decision -- the number of outlets that could be supported by a country's market demographics. In this instance, doing so can be accomplished effectively through modeling on a spreadsheet.The purposes of the case are to show the relation between national statistics and company decisions and to give students training in conceptualizing a problem and modeling the analysis on a spreadsheet. The analyst is required to estimate the potential market demand for Kodak Express.

Case Authors : David Currie, Ilan Alon

Topic : Innovation & Entrepreneurship

Related Areas : Economics, Emerging markets, Marketing

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Calculating Net Present Value (NPV) at 6% for Estimating Demand in Emerging Markets for Kodak Express Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10010151)	-10010151	-	-
Year 1	3454050	-6556101	3454050	0.9434	3258538
Year 2	3966947	-2589154	7420997	0.89	3530569
Year 3	3969196	1380042	11390193	0.8396	3332613
Year 4	3249356	4629398	14639549	0.7921	2573794
TOTAL			14639549		12695514

The Net Present Value at 6% discount rate is 2685363

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. Profitability Index
3. Net Present Value
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 Kodak Express 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. Kodak Express 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 Estimating Demand in Emerging Markets for Kodak Express

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 Kodak Express 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 Kodak Express 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	(10010151)	-10010151	-	-
Year 1	3454050	-6556101	3454050	0.8696	3003522
Year 2	3966947	-2589154	7420997	0.7561	2999582
Year 3	3969196	1380042	11390193	0.6575	2609811
Year 4	3249356	4629398	14639549	0.5718	1857830
TOTAL					10470744

The Net NPV after 4 years is 460593

(10470744 - 10010151 )

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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	(10010151)	-10010151	-	-
Year 1	3454050	-6556101	3454050	0.8333	2878375
Year 2	3966947	-2589154	7420997	0.6944	2754824
Year 3	3969196	1380042	11390193	0.5787	2296988
Year 4	3249356	4629398	14639549	0.4823	1567012
TOTAL					9497200

The Net NPV after 4 years is -512951

At 20% discount rate the NPV is negative (9497200 - 10010151 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Kodak Express 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 Kodak Express has a NPV value higher than Zero then finance managers at Kodak Express 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 Kodak Express, then the stock price of the Kodak Express 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 Kodak Express 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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.

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Negotiation Strategy of Estimating Demand in Emerging Markets for Kodak Express

References & Further Readings

David Currie, Ilan Alon (2018), "Estimating Demand in Emerging Markets for Kodak Express Harvard Business Review Case Study. Published by HBR Publications.