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VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR 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 VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR case study is a Harvard Business School (HBR) case study written by Maury Peiperl, Archana Jha. The VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR (referred as “Vinesh Juglal” 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






Case Description of VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR Case Study


Serial entrepreneur Vinesh Juglal wondered what it would be like to run Durban Computer College (DCC), the institution he had just bought. The education market in Africa was growing by leaps and bounds, and the ever-opportunistic Vinesh knew that buying a successful training enterprise could help him make the most of this market. On the other hand, Vinesh was well aware that in order to grow the institution he would need another source of financing, since his current lines were tied up in his real estate and supermarket businesses. Infrastructure was not an issue, since Vinesh had most of the fixed assets he needed to grow DCC Campus. Attracting more students would happen either by lowering fees or by offering financial aid. Vinesh had heard of many sponsoring bodies, including government programs, set up for this purpose. But these sponsors tended to give grants only to non-profit entities. What would be the best way to grow this "business"-if it could be called a business in the first place? Should he target the same return on investment as in his other businesses? More broadly, could he be successful using his previous, purely commercial approach? Learning objectives: To experience, almost first-hand, the rapidly changing business environment in South Africa in the 1985-2010 period, through the entrepreneurial adventures of Vinesh Juglal who builds a series of enterprisees across several industries. To consider the social role of business in the context of a developing country.


Case Authors : Maury Peiperl, Archana Jha

Topic : Leadership & Managing People

Related Areas :




Calculating Net Present Value (NPV) at 6% for VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10014200) -10014200 - -
Year 1 3454061 -6560139 3454061 0.9434 3258548
Year 2 3980104 -2580035 7434165 0.89 3542278
Year 3 3955048 1375013 11389213 0.8396 3320735
Year 4 3230420 4605433 14619633 0.7921 2558795
TOTAL 14619633 12680356




The Net Present Value at 6% discount rate is 2666156

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. 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. Timing of the expected cash flows – stockholders of Vinesh Juglal 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. Vinesh Juglal 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 VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR

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 Vinesh Juglal 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 Vinesh Juglal 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 (10014200) -10014200 - -
Year 1 3454061 -6560139 3454061 0.8696 3003531
Year 2 3980104 -2580035 7434165 0.7561 3009530
Year 3 3955048 1375013 11389213 0.6575 2600508
Year 4 3230420 4605433 14619633 0.5718 1847003
TOTAL 10460573


The Net NPV after 4 years is 446373

(10460573 - 10014200 )








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 (10014200) -10014200 - -
Year 1 3454061 -6560139 3454061 0.8333 2878384
Year 2 3980104 -2580035 7434165 0.6944 2763961
Year 3 3955048 1375013 11389213 0.5787 2288801
Year 4 3230420 4605433 14619633 0.4823 1557880
TOTAL 9489026


The Net NPV after 4 years is -525174

At 20% discount rate the NPV is negative (9489026 - 10014200 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Vinesh Juglal 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 Vinesh Juglal has a NPV value higher than Zero then finance managers at Vinesh Juglal 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 Vinesh Juglal, then the stock price of the Vinesh Juglal 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 Vinesh Juglal 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 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 can impact the cash flow of the project.

What will be a multi year spillover effect of various taxation regulations.

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.






Negotiation Strategy of VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR

References & Further Readings

Maury Peiperl, Archana Jha (2018), "VINESH JUGLAL: SOUTH AFRICAN SERIAL ENTREPRENEUR Harvard Business Review Case Study. Published by HBR Publications.


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