BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND 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 BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND case study is a Harvard Business School (HBR) case study written by Benoit Leleux, Jan Van Der Kaaij. The BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND (referred as “Bavaria Guerilla” 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, Succession 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 BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND Case Study

Peer Swinkels (36) took a moment in 2011 to reflect on the achievements and the challenges that lay ahead for the 330-year-old family brewery. Peer was responsible for the commercial activities of the company. Together with his fellow board members, he was quite aware that his predecessors had left behind a beer company that excelled in manufacturing but lacked the brand traction to really hit the big league. The challenge for the seventh generation was clearly to leverage its exceptional brewing skills to create an equally strong brand using the unique family values and culture nurtured since the company was created back in 1680. Bavaria stood for fierce independence and a high degree of entrepreneurship, mixing legacy with innovation. Despite its long history, Bavaria regarded itself as a fresh young company, as epitomized by its internal motto ("Let's try") and the branding pay-off of the Bavaria brand ("Done!"). In the last few years, Bavaria had made significant progress in (re-)positioning the brand. It had successfully revitalized it in its Dutch home market with a new brand design, and was now rolling it out on a global scale. It launched award-winning innovations such as alcohol-free white beers. Its innovative guerilla marketing activities at the World Soccer Championships in South Africa won applauses and recognition all over the world. Should the company roll out the same aggressive product and marketing tactics in its 120 markets? Would it be possible to pull off a new guerilla marketing campaign around the 2012 European Soccer Championships in Poland and Ukraine? What other channels should it consider to reinforce the brand and match its product innovation prowess? Learning objectives: Guerilla marketing, growth management, family business.

Case Authors : Benoit Leleux, Jan Van Der Kaaij

Topic : Leadership & Managing People

Related Areas : Succession planning

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Calculating Net Present Value (NPV) at 6% for BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10026388)	-10026388	-	-
Year 1	3464936	-6561452	3464936	0.9434	3268808
Year 2	3975339	-2586113	7440275	0.89	3538038
Year 3	3936193	1350080	11376468	0.8396	3304904
Year 4	3224389	4574469	14600857	0.7921	2554018
TOTAL			14600857		12665767

The Net Present Value at 6% discount rate is 2639379

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. Profitability Index
3. Payback Period
4. Net Present Value

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. Bavaria Guerilla 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 Bavaria Guerilla 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 BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND

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 Bavaria Guerilla 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 Bavaria Guerilla 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	(10026388)	-10026388	-	-
Year 1	3464936	-6561452	3464936	0.8696	3012988
Year 2	3975339	-2586113	7440275	0.7561	3005927
Year 3	3936193	1350080	11376468	0.6575	2588111
Year 4	3224389	4574469	14600857	0.5718	1843555
TOTAL					10450581

The Net NPV after 4 years is 424193

(10450581 - 10026388 )

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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	(10026388)	-10026388	-	-
Year 1	3464936	-6561452	3464936	0.8333	2887447
Year 2	3975339	-2586113	7440275	0.6944	2760652
Year 3	3936193	1350080	11376468	0.5787	2277889
Year 4	3224389	4574469	14600857	0.4823	1554972
TOTAL					9480960

The Net NPV after 4 years is -545428

At 20% discount rate the NPV is negative (9480960 - 10026388 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Bavaria Guerilla 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 Bavaria Guerilla has a NPV value higher than Zero then finance managers at Bavaria Guerilla 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 Bavaria Guerilla, then the stock price of the Bavaria Guerilla 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 Bavaria Guerilla 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 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.

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.

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 BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND

References & Further Readings

Benoit Leleux, Jan Van Der Kaaij (2018), "BAVARIA AND THE SWINKELS FAMILY: BREWING A STICKY BRAND Harvard Business Review Case Study. Published by HBR Publications.