The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida 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 The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida case study is a Harvard Business School (HBR) case study written by Ali Farhoomand, Shiu Kau Wong. The The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida (referred as “Mgv Fish” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Social enterprise.

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 The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida Case Study

In February 2007, Jonah Nobleza started Marina Gana Vida ("MGV") in the Davao coastal area in the Philippines, which historically had been the home of many subsistence fishermen living in poverty. MGV sold hatchery-bred fry fish seed stocks, fresh fish and packaged fish products produced in its own processing plant. The main social objective of MGV was to help the poor living in the area through job or business opportunities so that some day they could lift their households out of poverty. Since 2009, MGV had been gradually meeting its social, environmental and economic goals. It provided direct and indirect employment to many poor households. Nobleza faced conflicting goals as he tried to scale up MGV's production. Should he replace the women workers with machines that could produce more jars of processed fish products per day? Without a sizable business, he would have trouble proving his successful business model to those who would be willing to provide the much-needed funds to MGV. What could he do to balance his philanthropic and business goals in a social enterprise such as MGV?

Case Authors : Ali Farhoomand, Shiu Kau Wong

Topic : Innovation & Entrepreneurship

Related Areas : Social enterprise

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Calculating Net Present Value (NPV) at 6% for The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027339)	-10027339	-	-
Year 1	3456143	-6571196	3456143	0.9434	3260512
Year 2	3972753	-2598443	7428896	0.89	3535736
Year 3	3937633	1339190	11366529	0.8396	3306113
Year 4	3244525	4583715	14611054	0.7921	2569968
TOTAL			14611054		12672329

The Net Present Value at 6% discount rate is 2644990

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. Net Present Value
2. Internal Rate of Return
3. Profitability Index
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Mgv Fish shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Mgv Fish have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida

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 Mgv Fish 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 Mgv Fish 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	(10027339)	-10027339	-	-
Year 1	3456143	-6571196	3456143	0.8696	3005342
Year 2	3972753	-2598443	7428896	0.7561	3003972
Year 3	3937633	1339190	11366529	0.6575	2589058
Year 4	3244525	4583715	14611054	0.5718	1855068
TOTAL					10453439

The Net NPV after 4 years is 426100

(10453439 - 10027339 )

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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	(10027339)	-10027339	-	-
Year 1	3456143	-6571196	3456143	0.8333	2880119
Year 2	3972753	-2598443	7428896	0.6944	2758856
Year 3	3937633	1339190	11366529	0.5787	2278723
Year 4	3244525	4583715	14611054	0.4823	1564682
TOTAL					9482380

The Net NPV after 4 years is -544959

At 20% discount rate the NPV is negative (9482380 - 10027339 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mgv Fish 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 Mgv Fish has a NPV value higher than Zero then finance managers at Mgv Fish 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 Mgv Fish, then the stock price of the Mgv Fish 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 Mgv Fish 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 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.

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 The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida

References & Further Readings

Ali Farhoomand, Shiu Kau Wong (2018), "The Aquaculture Industry in the Philippines: Creating Social Values at Marina Gana Vida Harvard Business Review Case Study. Published by HBR Publications.