Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy 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 Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy case study is a Harvard Business School (HBR) case study written by James Kennelly, Trevor Mengel. The Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy (referred as “Sepil Protestors” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Ethics, Growth strategy, Social responsibility.

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 Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy Case Study

This case narrates a complex, long-running, and emotional controversy between Shell Exploration & Production Ireland (SEPIL) and opponents of its planned natural gas pipeline and gas processing facility in County Mayo, Ireland. The Corrib Gas Project is years behind schedule and over budget. SEPIL must not only complete the project, but must do so in a manner consistent with its own principles of corporate social responsibility. This case provides an opportunity to explore the challenges implicit in utilizing stakeholder management approaches. Students must evaluate various options available to SEPIL such as: Should the gas be processed at sea, as the more strident protestors demand? Should the processing facility be relocated to an area of no habitation, as other protestors wish, which would mean writing off a significant investment? For that matter, is this project worth completing at any cost? Finally, despite having all the required statutory approvals, final implementation would probably require utilizing the Garda SiochA?na (the Irish national police force) and other resources of the Irish State, as well as Shell's own contract security force, to keep protestors at bay. But what are the possible effects of such action on Shell's corporate reputation, and what if something, anything, goes wrong? It is not only which course of action SEPIL chooses to undertake, but how the action is implemented, that matters. This case is most appropriate for use in MBA and upper-level undergraduate courses in Business Ethics, Business and Society, International Business, and Business and the Natural Environment.

Case Authors : James Kennelly, Trevor Mengel

Topic : Leadership & Managing People

Related Areas : Ethics, Growth strategy, Social responsibility

Calculating Net Present Value (NPV) at 6% for Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10027485) -10027485 - -
Year 1 3450433 -6577052 3450433 0.9434 3255125
Year 2 3968564 -2608488 7418997 0.89 3532008
Year 3 3962260 1353772 11381257 0.8396 3326790
Year 4 3240684 4594456 14621941 0.7921 2566925
TOTAL 14621941 12680848

The Net Present Value at 6% discount rate is 2653363

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

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. Sepil Protestors 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 Sepil Protestors have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

Formula and Steps to Calculate Net Present Value (NPV) of Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy

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 Leadership & Managing People 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 Sepil Protestors 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 Sepil Protestors 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 (10027485) -10027485 - -
Year 1 3450433 -6577052 3450433 0.8696 3000377
Year 2 3968564 -2608488 7418997 0.7561 3000805
Year 3 3962260 1353772 11381257 0.6575 2605250
Year 4 3240684 4594456 14621941 0.5718 1852872
TOTAL 10459303

The Net NPV after 4 years is 431818

(10459303 - 10027485 )

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 (10027485) -10027485 - -
Year 1 3450433 -6577052 3450433 0.8333 2875361
Year 2 3968564 -2608488 7418997 0.6944 2755947
Year 3 3962260 1353772 11381257 0.5787 2292975
Year 4 3240684 4594456 14621941 0.4823 1562830
TOTAL 9487112

The Net NPV after 4 years is -540373

At 20% discount rate the NPV is negative (9487112 - 10027485 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Sepil Protestors 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 Sepil Protestors has a NPV value higher than Zero then finance managers at Sepil Protestors 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 Sepil Protestors, then the stock price of the Sepil Protestors 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 Sepil Protestors 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 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.

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.

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.

Negotiation Strategy of Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy

References & Further Readings

James Kennelly, Trevor Mengel (2018), "Shell E&P Ireland Limited (SEPIL) and the Corrib Gas Controversy Harvard Business Review Case Study. Published by HBR Publications.

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