Nestle India Limited: Maggi Noodles at War with the Regulators 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 Nestle India Limited: Maggi Noodles at War with the Regulators case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Nestle India Limited: Maggi Noodles at War with the Regulators case study is a Harvard Business School (HBR) case study written by Harvinder Singh, Rashmi Kumar Aggarwal, Rajinder Kaur, Rita Ghial. The Nestle India Limited: Maggi Noodles at War with the Regulators (referred as “Nestla Maggi” 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, Crisis management, International business, Public relations, 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

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Case Description of Nestle India Limited: Maggi Noodles at War with the Regulators Case Study

On May 21, 2015, food inspectors in the North Indian state of Uttar Pradesh tested Maggi instant noodles that had been manufactured by NestlA? India Limited. Their results led them to declare that the samples contained higher-than-permissible levels of monosodium glutamate and lead - substances that could, at those levels, potentially cause harm to consumers. The well-known brand accounted for 26 per cent of NestlA? India Limited's annual revenue, and the subsequent recall was a source of controversy. The recall was one of the biggest business stories of the year in India and was estimated to have cost NestlA? India Limited US$50 million. The company's response to the problem ranged from inaction and denial to attempts at rectification and redemption. The overall actions of the company were characterized by confusion regarding product safety and contradictory statements about the accusations that had been made against it. Given the material losses and the damage to both the Maggi and NestlA? India brands, the company wanted to know how the situation could be corrected - and avoided - in the future. Was the Food Safety and Standards Authority of India correct to recall Maggi noodles? Once the crisis was in motion, how could NestlA? India Limited have handled the situation to appease customers, regulators, and stakeholders? Harvinder Singh is affiliated with Institute of Management Technology, Ghaziabad. Rashmi Kumar Aggarwal is affiliated with Institute of Management Technology (IMT). Rajinder Kaur is affiliated with Panjab University.

Case Authors : Harvinder Singh, Rashmi Kumar Aggarwal, Rajinder Kaur, Rita Ghial

Topic : Leadership & Managing People

Related Areas : Crisis management, International business, Public relations, Strategy

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Calculating Net Present Value (NPV) at 6% for Nestle India Limited: Maggi Noodles at War with the Regulators Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016555)	-10016555	-	-
Year 1	3463810	-6552745	3463810	0.9434	3267745
Year 2	3977849	-2574896	7441659	0.89	3540271
Year 3	3969927	1395031	11411586	0.8396	3333227
Year 4	3239094	4634125	14650680	0.7921	2565666
TOTAL			14650680		12706910

The Net Present Value at 6% discount rate is 2690355

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. Internal Rate of Return
2. Net Present Value
3. Profitability Index
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. Nestla Maggi 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 Nestla Maggi 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 Nestle India Limited: Maggi Noodles at War with the Regulators

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 Nestla Maggi 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 Nestla Maggi 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	(10016555)	-10016555	-	-
Year 1	3463810	-6552745	3463810	0.8696	3012009
Year 2	3977849	-2574896	7441659	0.7561	3007825
Year 3	3969927	1395031	11411586	0.6575	2610291
Year 4	3239094	4634125	14650680	0.5718	1851963
TOTAL					10482088

The Net NPV after 4 years is 465533

(10482088 - 10016555 )

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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	(10016555)	-10016555	-	-
Year 1	3463810	-6552745	3463810	0.8333	2886508
Year 2	3977849	-2574896	7441659	0.6944	2762395
Year 3	3969927	1395031	11411586	0.5787	2297411
Year 4	3239094	4634125	14650680	0.4823	1562063
TOTAL					9508378

The Net NPV after 4 years is -508177

At 20% discount rate the NPV is negative (9508378 - 10016555 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nestla Maggi 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 Nestla Maggi has a NPV value higher than Zero then finance managers at Nestla Maggi 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 Nestla Maggi, then the stock price of the Nestla Maggi 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 Nestla Maggi 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 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.

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Negotiation Strategy of Nestle India Limited: Maggi Noodles at War with the Regulators

References & Further Readings

Harvinder Singh, Rashmi Kumar Aggarwal, Rajinder Kaur, Rita Ghial (2018), "Nestle India Limited: Maggi Noodles at War with the Regulators Harvard Business Review Case Study. Published by HBR Publications.