Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille 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 Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille case study is a Harvard Business School (HBR) case study written by Carsten Guderian, Peter M. Bican. The Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille (referred as “Onedollarglasses Bauer” 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, Entrepreneurship, Innovation, 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 Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille Case Study

In the fall of 2013, the family-owned Martin Bauer Group, a German-based company and world leader in the business-to-business market for tea and herbal extracts, became interested in the idea of collaborating with the frugal innovation company EinDollarBrille (OneDollarGlasses). The Martin Bauer Group was engaged in multifaceted corporate social responsibility activities, both domestically and abroad. Specifically, it fostered the development and diffusion of frugal innovations, which were affordable products or services developed under strict financial constraints to cater to low-income individuals in emerging markets. These companies usually worked in collaboration with partners. One such frugal innovation company, OneDollarGlasses, created durable, yet affordable, eyeglasses for people in the African country of Sudan, a prime sourcing market for the Martin Bauer Group. The work of OneDollarGlasses illustrated the reasons, motivations, and challenges that innovators often faced within developed and emerging markets when engaging in corporate social responsibility activities. Should The Martin Bauer Group work with OneDollarGlasses? Could the company be helpful and make a meaningful difference to the people in emerging markets by collaborating with frugal innovators like OneDollarGlasses? What benefits would there be for the Martin Bauer Group if they do? Peter M. Bican is affiliated with WHU - Otto Beisheim School of Management.

Case Authors : Carsten Guderian, Peter M. Bican

Topic : Leadership & Managing People

Related Areas : Entrepreneurship, Innovation, International business, Public relations, Strategy

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Calculating Net Present Value (NPV) at 6% for Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016576)	-10016576	-	-
Year 1	3444933	-6571643	3444933	0.9434	3249937
Year 2	3965006	-2606637	7409939	0.89	3528841
Year 3	3951749	1345112	11361688	0.8396	3317965
Year 4	3232293	4577405	14593981	0.7921	2560279
TOTAL			14593981		12657021

The Net Present Value at 6% discount rate is 2640445

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. Net Present Value
3. Profitability Index
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. Onedollarglasses Bauer 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 Onedollarglasses Bauer 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 Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille

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 Onedollarglasses Bauer 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 Onedollarglasses Bauer 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	(10016576)	-10016576	-	-
Year 1	3444933	-6571643	3444933	0.8696	2995594
Year 2	3965006	-2606637	7409939	0.7561	2998114
Year 3	3951749	1345112	11361688	0.6575	2598339
Year 4	3232293	4577405	14593981	0.5718	1848074
TOTAL					10440121

The Net NPV after 4 years is 423545

(10440121 - 10016576 )

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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	(10016576)	-10016576	-	-
Year 1	3444933	-6571643	3444933	0.8333	2870778
Year 2	3965006	-2606637	7409939	0.6944	2753476
Year 3	3951749	1345112	11361688	0.5787	2286892
Year 4	3232293	4577405	14593981	0.4823	1558783
TOTAL					9469929

The Net NPV after 4 years is -546647

At 20% discount rate the NPV is negative (9469929 - 10016576 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Onedollarglasses Bauer 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 Onedollarglasses Bauer has a NPV value higher than Zero then finance managers at Onedollarglasses Bauer 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 Onedollarglasses Bauer, then the stock price of the Onedollarglasses Bauer 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 Onedollarglasses Bauer 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 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 Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille

References & Further Readings

Carsten Guderian, Peter M. Bican (2018), "Martin Bauer Group: Corporate Social Responsibility with EinDollarBrille Harvard Business Review Case Study. Published by HBR Publications.