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WALTER MEIER: JET INTERNATIONAL EXPANSION 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 WALTER MEIER: JET INTERNATIONAL EXPANSION case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. WALTER MEIER: JET INTERNATIONAL EXPANSION case study is a Harvard Business School (HBR) case study written by Martin Roth, Dominique Turpin. The WALTER MEIER: JET INTERNATIONAL EXPANSION (referred as “Walter Meier” 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, .

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 WALTER MEIER: JET INTERNATIONAL EXPANSION Case Study


Charged with growing annual revenues by US$10 million over the next five years (2012-2017), half of which was to come from Latin America, Doug Quackenbos, head of global business development at Walter Meier Manufacturing Inc. had undertaken extensive market research to identify the best new international market opportunities for Walter Meier's JET brand of industrial products and metalworking and woodworking machinery.Specifically he identified Brazil as an attractive new market for expansion. Success would hinge on developing the right market-entry strategy. To that end, four foreign market entry options were identified: 1) Greenfield company-owned distribution strategy; 2) Partner with a Brazilian master distributor; 3) Acquire or form a joint venture (JV) with a Brazilian tool distributor; 4) Acquire or form a joint venture with a Brazilian tool manufacturer. Quackenbos would have to sell a strategic vision for growth that was not resource-intensive - a challenge for a mid-size player in a market filled with a range of regional and national competitors. Based on what he was about to propose, and against the backdrop of a soft, recessionary global industrial economic environment, Walter Meier's executive team would question the merits of expanding into new emerging markets, the attractiveness of Latin America, and specifically the advantages of entering Brazil. The case provides background information on the company and the metal and woodworking machinery markets and competition in each of them. Walter Meier's international expansion aspirations are described, and the process for identifying Brazil as a new market for expansion is explained. The case concludes with the trigger issue of which foreign market entry mode will work best for Walter Meier in Brazil. A supplemental 10-minute video interview is also available. The video captures Doug Quackenbos's views on the international business development opportunities and challenges for a medium-size company, how he gathers market intelligence and manages uncertainty, and what he foresees for Walter Meier in Latin America and Brazil. Learning objectives: (1) Foreign market attractiveness, in particular the pursuit of opportunistic growth strategies; (2) Challenges medium size companies in business-to-business markets face when seeking growth internationally; (3) Opportunities and threats in entering emerging "BRIC" markets; (4) Evaluation of foreign market entry modes; (5) Securing distribution in new international markets.


Case Authors : Martin Roth, Dominique Turpin

Topic : Leadership & Managing People

Related Areas :




Calculating Net Present Value (NPV) at 6% for WALTER MEIER: JET INTERNATIONAL EXPANSION Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10026842) -10026842 - -
Year 1 3454086 -6572756 3454086 0.9434 3258572
Year 2 3958754 -2614002 7412840 0.89 3523277
Year 3 3944844 1330842 11357684 0.8396 3312167
Year 4 3238949 4569791 14596633 0.7921 2565551
TOTAL 14596633 12659567


The Net Present Value at 6% discount rate is 2632725

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. Internal Rate of Return
3. Net Present Value
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. Walter Meier 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 Walter Meier 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 WALTER MEIER: JET INTERNATIONAL EXPANSION

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 Walter Meier 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 Walter Meier 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 (10026842) -10026842 - -
Year 1 3454086 -6572756 3454086 0.8696 3003553
Year 2 3958754 -2614002 7412840 0.7561 2993387
Year 3 3944844 1330842 11357684 0.6575 2593799
Year 4 3238949 4569791 14596633 0.5718 1851880
TOTAL 10442618


The Net NPV after 4 years is 415776

(10442618 - 10026842 )






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 (10026842) -10026842 - -
Year 1 3454086 -6572756 3454086 0.8333 2878405
Year 2 3958754 -2614002 7412840 0.6944 2749135
Year 3 3944844 1330842 11357684 0.5787 2282896
Year 4 3238949 4569791 14596633 0.4823 1561993
TOTAL 9472429


The Net NPV after 4 years is -554413

At 20% discount rate the NPV is negative (9472429 - 10026842 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Walter Meier 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 Walter Meier has a NPV value higher than Zero then finance managers at Walter Meier 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 Walter Meier, then the stock price of the Walter Meier 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 Walter Meier 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.

Understanding of risks involved in 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.

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.




References & Further Readings

Martin Roth, Dominique Turpin (2018), "WALTER MEIER: JET INTERNATIONAL EXPANSION Harvard Business Review Case Study. Published by HBR Publications.