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Intel Asia-Pacific: The Catch & Win Campaign 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 Intel Asia-Pacific: The Catch & Win Campaign case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Intel Asia-Pacific: The Catch & Win Campaign case study is a Harvard Business School (HBR) case study written by Peter C. Bell, John Lyons, Peter Dingle, Ash Supersad. The Intel Asia-Pacific: The Catch & Win Campaign (referred as “Media Catch” 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, Corporate communications, IT, Social platforms.

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 Intel Asia-Pacific: The Catch & Win Campaign Case Study


The head of Data Marketing Analytics and Mobile for Intel Asia-Pacific was reviewing the proposed media plan for the Catch & Win 2.0 campaign. The media purchase needed to be finalized quickly in order to be included in the current quarter's budget, but he could not help feeling that the proposed spend across the markets and advertising types could be used more effectively. He thought that the key was to use the company's own experience and data regarding social media engagement within their markets rather than to rely on the generalized industry metrics provided by the contracted media agency, and now he must improve the proposed media plan.


Case Authors : Peter C. Bell, John Lyons, Peter Dingle, Ash Supersad

Topic : Leadership & Managing People

Related Areas : Corporate communications, IT, Social platforms




Calculating Net Present Value (NPV) at 6% for Intel Asia-Pacific: The Catch & Win Campaign Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10029082) -10029082 - -
Year 1 3443850 -6585232 3443850 0.9434 3248915
Year 2 3969779 -2615453 7413629 0.89 3533089
Year 3 3947911 1332458 11361540 0.8396 3314742
Year 4 3235180 4567638 14596720 0.7921 2562566
TOTAL 14596720 12659312


The Net Present Value at 6% discount rate is 2630230

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. Payback Period
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 Media Catch 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. Media Catch 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 Intel Asia-Pacific: The Catch & Win Campaign

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 Media Catch 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 Media Catch 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 (10029082) -10029082 - -
Year 1 3443850 -6585232 3443850 0.8696 2994652
Year 2 3969779 -2615453 7413629 0.7561 3001723
Year 3 3947911 1332458 11361540 0.6575 2595816
Year 4 3235180 4567638 14596720 0.5718 1849725
TOTAL 10441916


The Net NPV after 4 years is 412834

(10441916 - 10029082 )






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 (10029082) -10029082 - -
Year 1 3443850 -6585232 3443850 0.8333 2869875
Year 2 3969779 -2615453 7413629 0.6944 2756791
Year 3 3947911 1332458 11361540 0.5787 2284671
Year 4 3235180 4567638 14596720 0.4823 1560176
TOTAL 9471512


The Net NPV after 4 years is -557570

At 20% discount rate the NPV is negative (9471512 - 10029082 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Media Catch 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 Media Catch has a NPV value higher than Zero then finance managers at Media Catch 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 Media Catch, then the stock price of the Media Catch 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 Media Catch 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 can impact the cash flow of the project.

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.

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

Peter C. Bell, John Lyons, Peter Dingle, Ash Supersad (2018), "Intel Asia-Pacific: The Catch & Win Campaign Harvard Business Review Case Study. Published by HBR Publications.