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Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc. 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 Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc. case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc. case study is a Harvard Business School (HBR) case study written by Nancy M. Levenburg. The Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc. (referred as “Lean Daktronics” 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, Manufacturing, Product development.

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 Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc. Case Study


For over forty years, Daktronics, Inc. had been one of the world's leading suppliers of electronic scoreboards, large electronic display systems, digital messaging solutions, software and services for sports venues, commercial and transportation applications. After decades of producing its products using a batch system, the multi-million dollar company made a formal decision to pursue lean manufacturing in February, 2006. The lean initiative took on even greater importance due to sluggishness in the U.S. economy and slowed sales in 2009. Now in 2010, four years after the lean project's initial launch, readers are asked, how successful has the lean conversion been, including the transition from a batch system to a high mix, flow line system? Is the firm poised and ready to extend its lean initiative to nonmanufacturing areas? By using clues within the case and detailed exhibits, the case provides a rich opportunity for readers to trace and evaluate an original equipment manufacturer's (OEM) lean journey. Ultimately, they should be able to answer questions, such as: What kinds of things did Daktronics appear to do correctly? What kinds of things could Daktronics have done differently... or better? What recommendations might follow from their experience for other OEMs that seek to implement lean manufacturing? What are the pros and cons of implementing lean techniques in nonmanufacturing areas?


Case Authors : Nancy M. Levenburg

Topic : Leadership & Managing People

Related Areas : Manufacturing, Product development




Calculating Net Present Value (NPV) at 6% for Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc. Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10010390) -10010390 - -
Year 1 3443904 -6566486 3443904 0.9434 3248966
Year 2 3966565 -2599921 7410469 0.89 3530229
Year 3 3962215 1362294 11372684 0.8396 3326752
Year 4 3239050 4601344 14611734 0.7921 2565631
TOTAL 14611734 12671578




The Net Present Value at 6% discount rate is 2661188

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. 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. Timing of the expected cash flows – stockholders of Lean Daktronics 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. Lean Daktronics 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 Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc.

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 Lean Daktronics 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 Lean Daktronics 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 (10010390) -10010390 - -
Year 1 3443904 -6566486 3443904 0.8696 2994699
Year 2 3966565 -2599921 7410469 0.7561 2999293
Year 3 3962215 1362294 11372684 0.6575 2605221
Year 4 3239050 4601344 14611734 0.5718 1851937
TOTAL 10451150


The Net NPV after 4 years is 440760

(10451150 - 10010390 )








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 (10010390) -10010390 - -
Year 1 3443904 -6566486 3443904 0.8333 2869920
Year 2 3966565 -2599921 7410469 0.6944 2754559
Year 3 3962215 1362294 11372684 0.5787 2292948
Year 4 3239050 4601344 14611734 0.4823 1562042
TOTAL 9479469


The Net NPV after 4 years is -530921

At 20% discount rate the NPV is negative (9479469 - 10010390 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Lean Daktronics 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 Lean Daktronics has a NPV value higher than Zero then finance managers at Lean Daktronics 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 Lean Daktronics, then the stock price of the Lean Daktronics 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 Lean Daktronics 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 key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Understanding of risks involved in the project.

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

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.

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 Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc.

References & Further Readings

Nancy M. Levenburg (2018), "Daktronics (D): Keen on Lean Manufacturing at Daktronics, Inc. Harvard Business Review Case Study. Published by HBR Publications.


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