The Canadian Telecommunications: Industry Regulation and Policy 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 The Canadian Telecommunications: Industry Regulation and Policy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Canadian Telecommunications: Industry Regulation and Policy case study is a Harvard Business School (HBR) case study written by Adam Fremeth, Ken Mark. The The Canadian Telecommunications: Industry Regulation and Policy (referred as “Globalive Wireless” 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, Strategic planning.

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

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Case Description of The Canadian Telecommunications: Industry Regulation and Policy Case Study

This case study is based on a high profile issue facing the Canadian Federal Government - still ongoing as of December 2010 - that had begun in 2008. Industry Canada, working from a set of policy objectives crafted over the period of three years, decided that, in the auction sale of wireless spectrum set for 2008, it would set aside 40 per cent of the spectrum for new entrants. This decision had come about because research indicated that Canadian usage of wireless services had lagged behind that of other developed countries and that this was primarily due to the high relative cost of wireless services. This was in contrast to only a decade earlier when Canada was seen as a global leader in the implementation of wireless technology. It is well understood that telecommunication adoption rates have a direct implication to the productivity of the Canadian economy. One of the new entrants was Globalive Communications Corporation (Globalive), a startup which was funded by Orascom Telecom Holding S.A.E. (Orascom), an Egyptian company. Despite the fact that Canada has well defined foreign ownership restrictions for the telecommunications sector, Globalive was allowed to bid. It won, and paid $442 million for its spectrum, began to hire hundreds of staff, and committed another $300 million to investing in wireless infrastructure.From the time Globalive applied to participate in the spectrum auction to the period prior to its official launch, the firm met several times with Industry Canada, the Canadian Radio-television and Telecommunications Commission (CRTC), and the Prime Minister's Office (PMO) to ensure that its ownership was structured so as to fit within the foreign ownership restrictions.

Case Authors : Adam Fremeth, Ken Mark

Topic : Leadership & Managing People

Related Areas : Strategic planning

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Calculating Net Present Value (NPV) at 6% for The Canadian Telecommunications: Industry Regulation and Policy Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10005909)	-10005909	-	-
Year 1	3455615	-6550294	3455615	0.9434	3260014
Year 2	3968590	-2581704	7424205	0.89	3532031
Year 3	3957166	1375462	11381371	0.8396	3322513
Year 4	3240392	4615854	14621763	0.7921	2566694
TOTAL			14621763		12681252

The Net Present Value at 6% discount rate is 2675343

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.

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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. Net Present Value
4. Internal Rate of Return

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

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Formula and Steps to Calculate Net Present Value (NPV) of The Canadian Telecommunications: Industry Regulation and Policy

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 Globalive Wireless 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 Globalive Wireless 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	(10005909)	-10005909	-	-
Year 1	3455615	-6550294	3455615	0.8696	3004883
Year 2	3968590	-2581704	7424205	0.7561	3000824
Year 3	3957166	1375462	11381371	0.6575	2601901
Year 4	3240392	4615854	14621763	0.5718	1852705
TOTAL					10460312

The Net NPV after 4 years is 454403

(10460312 - 10005909 )

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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	(10005909)	-10005909	-	-
Year 1	3455615	-6550294	3455615	0.8333	2879679
Year 2	3968590	-2581704	7424205	0.6944	2755965
Year 3	3957166	1375462	11381371	0.5787	2290027
Year 4	3240392	4615854	14621763	0.4823	1562689
TOTAL					9488360

The Net NPV after 4 years is -517549

At 20% discount rate the NPV is negative (9488360 - 10005909 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Globalive Wireless 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 Globalive Wireless has a NPV value higher than Zero then finance managers at Globalive Wireless 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 Globalive Wireless, then the stock price of the Globalive Wireless 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 Globalive Wireless 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 will be a multi year spillover effect of various taxation regulations.

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.

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.

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Negotiation Strategy of The Canadian Telecommunications: Industry Regulation and Policy

References & Further Readings

Adam Fremeth, Ken Mark (2018), "The Canadian Telecommunications: Industry Regulation and Policy Harvard Business Review Case Study. Published by HBR Publications.