Network for Information & Computer Technology: Diversify or Consolidate? 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 Network for Information & Computer Technology: Diversify or Consolidate? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Network for Information & Computer Technology: Diversify or Consolidate? case study is a Harvard Business School (HBR) case study written by Shubhabrata Basu. The Network for Information & Computer Technology: Diversify or Consolidate? (referred as “Nict India” 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

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Case Description of Network for Information & Computer Technology: Diversify or Consolidate? Case Study

The chief executive officer of Network for Information & Computer Technology (NICT), an information and communications technology implementation firm, had to consider a proposal from India Post in which the latter would leverage NICT's franchisee-based last-mile customer service kiosks to offer banking solutions to rural areas in India. With the deal, the Post Bank of India would emerge as India's largest commercial bank. NICT's network of customer service kiosks was already used in a limited capacity by public-sector banks (the Bank of India and the State Bank of India). The India Post offer could stabilize the financial health of NICT and enable it to venture into new domains. However, its current partners might object to the relationship with India Post and withdraw from their partnership. While NICT had the competencies to serve its current clients, it would need to build new ones for India Post. The CEO had to choose between this emerging, possibly highly profitable opportunity and the existing but less profitable partners.

Case Authors : Shubhabrata Basu

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Network for Information & Computer Technology: Diversify or Consolidate? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10021695)	-10021695	-	-
Year 1	3458217	-6563478	3458217	0.9434	3262469
Year 2	3965670	-2597808	7423887	0.89	3529432
Year 3	3959370	1361562	11383257	0.8396	3324363
Year 4	3245067	4606629	14628324	0.7921	2570397
TOTAL			14628324		12686661

The Net Present Value at 6% discount rate is 2664966

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. Internal Rate of Return
4. Profitability Index

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 Nict India 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. Nict India shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Network for Information & Computer Technology: Diversify or Consolidate?

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 Nict India 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 Nict India 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	(10021695)	-10021695	-	-
Year 1	3458217	-6563478	3458217	0.8696	3007145
Year 2	3965670	-2597808	7423887	0.7561	2998616
Year 3	3959370	1361562	11383257	0.6575	2603350
Year 4	3245067	4606629	14628324	0.5718	1855378
TOTAL					10464489

The Net NPV after 4 years is 442794

(10464489 - 10021695 )

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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	(10021695)	-10021695	-	-
Year 1	3458217	-6563478	3458217	0.8333	2881848
Year 2	3965670	-2597808	7423887	0.6944	2753938
Year 3	3959370	1361562	11383257	0.5787	2291302
Year 4	3245067	4606629	14628324	0.4823	1564944
TOTAL					9492031

The Net NPV after 4 years is -529664

At 20% discount rate the NPV is negative (9492031 - 10021695 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nict India 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 Nict India has a NPV value higher than Zero then finance managers at Nict India 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 Nict India, then the stock price of the Nict India 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 Nict India 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 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 can impact the cash flow of the project.

Understanding of risks involved in the project.

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 Network for Information & Computer Technology: Diversify or Consolidate?

References & Further Readings

Shubhabrata Basu (2018), "Network for Information & Computer Technology: Diversify or Consolidate? Harvard Business Review Case Study. Published by HBR Publications.