How do you deal with negative NPV projects that have strategic value?

由人工智能和领英社区提供技术支持

Capital budgeting is the process of evaluating and selecting long-term investments that align with your business goals and strategy. One of the most common tools for capital budgeting is net present value (NPV), which measures the difference between the present value of cash inflows and outflows of a project. A positive NPV means that the project is profitable and adds value to your firm, while a negative NPV means that the project is unprofitable and destroys value. However, not all projects can be judged solely by their NPV. Sometimes, you may encounter negative NPV projects that have strategic value for your firm, such as entering a new market, creating a competitive advantage, or enhancing your reputation. How do you deal with these projects? Here are some tips to help you make better capital budgeting decisions.

此文章中的业界达人

由社区从 4 条内容中精选。了解更多

1 Consider the alternatives

Before you reject a negative NPV project, you should consider the alternatives. What are the opportunity costs of not pursuing the project? What are the risks of losing market share, customer loyalty, or brand image? What are the potential benefits of waiting for a better project or investing in something else? You should compare the negative NPV project with the best alternative use of your funds, and see if the strategic value outweighs the financial loss.

添加您的观点

Ryan Merriam

Senior Cybersecurity Supervision Manager - LFBO Technology Risk Supervision Program
举报内容
My view is that many of these alternatives are able to be built into an NPV model through scenario analysis. Consider the following: - Adjusting your NPV model for potential loss of market share if an action is not taken. - Loss of sales due to brand damage because of a lack of spend -attrition in loyal customers and the cash flow impact due to not replacing dated systems While these items might be difficult to build into a model, engaging a cross functional team within your organization to ask difficult questions can help finance present effective NPV scenario analysis that resonates with executives.

已翻译

赞
Rejoe Koshy

Ex Tata Steel Processing and Distribution Ltd.
举报内容
A project with a strategic value translates to economic value in the future given enough time.That is the time we need to consider when calculating NPV. By the above argument , a project with a true strategic value can never have negative NPV. Negative NPV is a result of calculating it over incorrect time periods and wrong projections of discount rate.

已翻译

赞

2 Adjust the discount rate

Another way to deal with negative NPV projects is to adjust the discount rate. The discount rate reflects the required rate of return on your investment, and it affects the present value of future cash flows. A higher discount rate means a lower present value, and vice versa. If you think that the discount rate is too high for a negative NPV project, you can lower it to reflect the strategic value of the project. For example, you can use a lower discount rate for projects that have a high growth potential, a strong competitive edge, or a positive social impact.

添加您的观点

3 Use real options

A third way to deal with negative NPV projects is to use real options. Real options are opportunities to modify or abandon a project in response to changing conditions or new information. For example, you can have the option to expand, contract, defer, or abandon a project depending on the market demand, the competitors' actions, or the technological innovations. Real options can increase the value of a project by reducing uncertainty, enhancing flexibility, and creating upside potential. You can use real options analysis to estimate the value of these options and add them to the NPV of the project.

添加您的观点

Meng Hock Tan ????

External Audit | Financial Reporting | Know Your Client Compliance | Big Four | Associate Member of the Institute of Singapore Chartered Accountants (ISCA)
举报内容
Real-options analysis is a method that explicitly recognizes uncertainties and future managerial actions taken over the life of a capital investment project. It requires the formulation of scenarios that include a range of probability estimates and options, so it may be particularly suitable for the analysis of major capital investment projects with very long-time frames, where are very high level of uncertainty. The uncertainty associated with estimating the future cash flows for capital investment proposals can be attributed to quite a few sources such as competitors, customers, and technology, just naming a few. By using the real-options analysis, the outcome of the NPV analyses can then be compared to the NPVs for other alternatives.

已翻译

赞

4 Evaluate the synergies

A fourth way to deal with negative NPV projects is to evaluate the synergies. Synergies are the benefits that arise from combining two or more projects or activities that create more value together than separately. For example, you can have synergies from economies of scale, cost savings, revenue enhancement, or resource utilization. Synergies can increase the NPV of a project by improving the cash flows, reducing the costs, or increasing the revenues. You can use synergy analysis to identify and quantify the sources and effects of synergies and add them to the NPV of the project.

添加您的观点

5 Monitor and review

A final way to deal with negative NPV projects is to monitor and review them regularly. You should track the performance and progress of the project, and compare it with the expected outcomes and assumptions. You should also update the NPV calculation with the latest data and information, and adjust the discount rate, the real options, and the synergies as needed. You should also be ready to make changes or terminate the project if it does not deliver the strategic value or if it becomes too risky or costly.

添加您的观点

Meng Hock Tan ????

External Audit | Financial Reporting | Know Your Client Compliance | Big Four | Associate Member of the Institute of Singapore Chartered Accountants (ISCA)
(已编辑)
举报内容
Moreover, there are least-cost situations whereby proposed investments with negative NPV would still be accepted. An example of a least-cost decision is expenditure on equipment to satisfy safety requirements or environmental laws. In least-cost decisions, the proposal with the least negative NPV should be accepted (i.e., the lowest NPV). Whether it will bring any strategic value, it will remain to be closely monitored and reviewed such as using the real-options analysis to conduct the NPV analyses. As explained, the least-cost situations are for the purpose of compliance with certain rules and regulations being imposed by the state government regulatory authority.

已翻译

赞

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

添加您的观点

Capital Budgeting

+ 关注

给文章评分

我们借助人工智能创建了此文章。您认为这篇文章怎么样？

很棒不太好

举报此文章

查看全部

How do you deal with negative NPV projects that have strategic value?

1

2

3

4

5

6

1 Consider the alternatives

2 Adjust the discount rate

3 Use real options

4 Evaluate the synergies

5 Monitor and review

6 Here’s what else to consider

Capital Budgeting

给文章评分

感谢您的反馈

更多Capital Budgeting相关文章

更多相关阅读内容