×




Oberoi Hotels: Train Whistle in the Tiger Reserve 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 Oberoi Hotels: Train Whistle in the Tiger Reserve case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Oberoi Hotels: Train Whistle in the Tiger Reserve case study is a Harvard Business School (HBR) case study written by Ryan W. Buell, Ananth Raman, Vidhya Muthuram. The Oberoi Hotels: Train Whistle in the Tiger Reserve (referred as “Oberoi Hotels” 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, Developing employees, Labor, Motivating people, Product development, Supply chain.

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 Oberoi Hotels: Train Whistle in the Tiger Reserve Case Study


Celebrated as one of the world's premiere luxury hotel brands, Oberoi Hotels attracts and serves some of the most quality sensitive guests in the world. The case considers the challenge of how an organization, with a standardized service model, can repeatedly delight customers whose expectations grow with every interaction. To explore this question, the case details the design elements of Oberoi's complex service operation, including its approaches to employee management and continuous improvement, as well as the dynamics of service competition in a rapidly growing market. Teaching Note includes links to videos intended for display during classroom debrief.


Case Authors : Ryan W. Buell, Ananth Raman, Vidhya Muthuram

Topic : Leadership & Managing People

Related Areas : Developing employees, Labor, Motivating people, Product development, Supply chain




Calculating Net Present Value (NPV) at 6% for Oberoi Hotels: Train Whistle in the Tiger Reserve Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10005084) -10005084 - -
Year 1 3445961 -6559123 3445961 0.9434 3250907
Year 2 3962566 -2596557 7408527 0.89 3526670
Year 3 3957416 1360859 11365943 0.8396 3322723
Year 4 3245036 4605895 14610979 0.7921 2570372
TOTAL 14610979 12670671


The Net Present Value at 6% discount rate is 2665587

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. Net Present Value
3. Internal Rate of Return
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. Timing of the expected cash flows – stockholders of Oberoi Hotels 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. Oberoi Hotels 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 Oberoi Hotels: Train Whistle in the Tiger Reserve

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 Oberoi Hotels 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 Oberoi Hotels 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 (10005084) -10005084 - -
Year 1 3445961 -6559123 3445961 0.8696 2996488
Year 2 3962566 -2596557 7408527 0.7561 2996269
Year 3 3957416 1360859 11365943 0.6575 2602065
Year 4 3245036 4605895 14610979 0.5718 1855360
TOTAL 10450182


The Net NPV after 4 years is 445098

(10450182 - 10005084 )






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 (10005084) -10005084 - -
Year 1 3445961 -6559123 3445961 0.8333 2871634
Year 2 3962566 -2596557 7408527 0.6944 2751782
Year 3 3957416 1360859 11365943 0.5787 2290171
Year 4 3245036 4605895 14610979 0.4823 1564929
TOTAL 9478516


The Net NPV after 4 years is -526568

At 20% discount rate the NPV is negative (9478516 - 10005084 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Oberoi Hotels 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 Oberoi Hotels has a NPV value higher than Zero then finance managers at Oberoi Hotels 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 Oberoi Hotels, then the stock price of the Oberoi Hotels 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 Oberoi Hotels 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 can impact the cash flow of the project.

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.

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

Ryan W. Buell, Ananth Raman, Vidhya Muthuram (2018), "Oberoi Hotels: Train Whistle in the Tiger Reserve Harvard Business Review Case Study. Published by HBR Publications.