Capital Budgeting Case Study: Reliance
Jio’s ₹30,000 Crore Investment
Practical Application of NPV, IRR &
Payback Period
Introduction to Capital Budgeting & Case
Study
• - Capital Budgeting helps businesses make long-
term investment decisions.
• - Reliance Jio invested ₹30,000 crores in
telecom infrastructure before launching in
2016.
• - This decision disrupted the Indian telecom
market, forcing competitors to lower prices.
• - We will analyze this investment using NPV,
IRR, and Payback Period.
Reliance Jio’s ₹30,000 Crore Investment
Decision
• - Jio built nationwide telecom infrastructure
before launching services.
• - Offered free voice calls & data initially to
capture market share.
• - Competitors struggled due to sudden price
disruptions.
• - Question: Was this a smart investment? Let’s
analyze using financial metrics.
Net Present Value (NPV) Analysis
• - Initial Investment: ₹30,000 Crores
• - Expected Cash Flows (Years 1-3): Negative
due to infrastructure costs & free services.
• - Expected Cash Flows (Years 4-10): Strong
positive cash flows from paid subscribers.
• - Discount Rate: 10% (Industry Standard)
• - NPV turned positive after Year 5, making the
investment financially viable.
Net Present Value (NPV) Formula &
Example
• **Formula:**
• NPV = ∑ (Cash Flow / (1 + r)^t) - Initial Investment
• **Example:**
• - Initial Investment: ₹5,000 Crores
• - Cash Flows: Year 1 = ₹1,000 Cr, Year 2 = ₹1,500 Cr, Year 3 = ₹2,000
Cr
• - Discount Rate (r) = 10%
• **Solution:**
• NPV = (1000/1.1) + (1500/1.1^2) + (2000/1.1^3) - 5000
• If NPV > 0, the investment is profitable.
Internal Rate of Return (IRR)
• - IRR is the discount rate that makes NPV = 0.
• - Jio’s estimated IRR was **18-20%**, higher
than the industry benchmark of 12-14%.
• - A high IRR justified the long-term profitability
of the investment.
Internal Rate of Return (IRR) Formula &
Example
• **Formula:**
• IRR is the discount rate (r) where:
• NPV = ∑ (Cash Flow / (1 + r)^t) - Initial Investment = 0
• **Example:**
• - Initial Investment: ₹10,000 Crores
• - Cash Flows: Year 1 = ₹3,000 Cr, Year 2 = ₹4,000 Cr,
Year 3 = ₹5,000 Cr
• - IRR is the rate where NPV = 0, solved using trial &
error or Excel’s IRR function.
Payback Period Calculation
• - Initial Outlay: ₹30,000 Crores
• - Annual Revenue Growth reached ₹1,00,000
Crores in 2023.
• - Break-even achieved in **5-6 years**.
• - This highlights the importance of patience in
capital budgeting decisions.
Payback Period Formula & Example
• **Formula:**
• Payback Period = Initial Investment / Annual Cash
Inflow
• **Example:**
• - Initial Investment: ₹6,000 Crores
• - Annual Cash Inflow: ₹2,000 Crores
• - Payback Period = 6000 / 2000 = 3 years
• If payback is within the acceptable range, the
investment is considered safe.
Key Takeaways from Jio’s Capital Budgeting
Decision
• - **Strategic Vision:** Jio accepted short-term
losses for long-term gains.
• - **High-Risk, High-Reward:** Delayed
payback but market dominance.
• - **Financial Justification:** NPV & IRR
analysis supported the investment.
• - **Lesson:** Bold capital budgeting decisions
can disrupt industries.
Conclusion & Discussion Questions
• - Jio’s capital investment led to **industry
disruption & dominance**.
• - **Would you approve a high-risk investment
with delayed payback?**
• - **What factors should companies consider
before making such decisions?**
• - Open to Q&A!
