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Whirlpool and the Built-in Appliance Industry in India 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 Whirlpool and the Built-in Appliance Industry in India case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Whirlpool and the Built-in Appliance Industry in India case study is a Harvard Business School (HBR) case study written by Sandeep Puri, Adeshwar Raja Balaji Prasad, Natarajan Anc, Parasaran Vs. The Whirlpool and the Built-in Appliance Industry in India (referred as “Whirlpool Appliances” 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, Marketing, Strategy.

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 Whirlpool and the Built-in Appliance Industry in India Case Study


India's real estate boom led to the built-in appliances industry's biggest opportunity. In 2010 and 2011, a total of 533,954 residential units were launched in seven top cities: Mumbai, National Capital Region, Pune, Kolkata, Bengaluru, Chennai and Hyderabad. As the market evolved and demand increased, investments and improvements in infrastructure, software, education, work force, installation, after-sales service, logistics were guaranteed to occur. This was expected to initiate a cycle of profitable growth. Whirlpool was already an established player in the home appliances segment. Given the improving industry described above, should Whirlpool tap this emerging market? If so, what might be its strategic objectives and positioning strategies for dealing with the competition and appealing to its prospective customers? Sandeep Puri, Adeshwar Raja Balaji Prasad, Natarajan ANC, Parasan VS, Sashikanth Yenika, and Vijay Kumar Venna are affiliated with Institute of Management Technology.


Case Authors : Sandeep Puri, Adeshwar Raja Balaji Prasad, Natarajan Anc, Parasaran Vs

Topic : Leadership & Managing People

Related Areas : Marketing, Strategy




Calculating Net Present Value (NPV) at 6% for Whirlpool and the Built-in Appliance Industry in India Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10003068) -10003068 - -
Year 1 3445457 -6557611 3445457 0.9434 3250431
Year 2 3958546 -2599065 7404003 0.89 3523092
Year 3 3969673 1370608 11373676 0.8396 3333014
Year 4 3238918 4609526 14612594 0.7921 2565526
TOTAL 14612594 12672063




The Net Present Value at 6% discount rate is 2668995

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. Profitability Index
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. Timing of the expected cash flows – stockholders of Whirlpool Appliances 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. Whirlpool Appliances 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 Whirlpool and the Built-in Appliance Industry in India

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 Whirlpool Appliances 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 Whirlpool Appliances 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 (10003068) -10003068 - -
Year 1 3445457 -6557611 3445457 0.8696 2996050
Year 2 3958546 -2599065 7404003 0.7561 2993229
Year 3 3969673 1370608 11373676 0.6575 2610124
Year 4 3238918 4609526 14612594 0.5718 1851862
TOTAL 10451265


The Net NPV after 4 years is 448197

(10451265 - 10003068 )








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 (10003068) -10003068 - -
Year 1 3445457 -6557611 3445457 0.8333 2871214
Year 2 3958546 -2599065 7404003 0.6944 2748990
Year 3 3969673 1370608 11373676 0.5787 2297264
Year 4 3238918 4609526 14612594 0.4823 1561978
TOTAL 9479447


The Net NPV after 4 years is -523621

At 20% discount rate the NPV is negative (9479447 - 10003068 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Whirlpool Appliances 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 Whirlpool Appliances has a NPV value higher than Zero then finance managers at Whirlpool Appliances 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 Whirlpool Appliances, then the stock price of the Whirlpool Appliances 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 Whirlpool Appliances 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 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 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.






Negotiation Strategy of Whirlpool and the Built-in Appliance Industry in India

References & Further Readings

Sandeep Puri, Adeshwar Raja Balaji Prasad, Natarajan Anc, Parasaran Vs (2018), "Whirlpool and the Built-in Appliance Industry in India Harvard Business Review Case Study. Published by HBR Publications.


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