ANSWER 2
STRATEGIC INVESTMENT DECISION FOR PROCTER & GAMBLE –
A DCF-BASED EVALUATION OF CHINA VS. EUROPE EXPANSIONK
Procter & Gamble is considering expanding operations into two regions: China and Europe.
Both proposals span a 4-year horizon and involve initial capital expenditure along with
operational costs. Key financial data and projections for each market were obtained directly
from the provided case material.
1- KEY FINANCIAL HIGHLIGHTS:
Metric
China Proposal
Europe Proposal
Project Duration
4 years
4 years
Initial CapEx
$1 million/year
$1 million/year
Depreciation
$1 million/year
$1 million/year
Terminal Growth Rate
3%
3%
Discount Rate (WACC)
10%
10%
Corporate Tax Rate
30%
30%
2- ASSUMPTIONS:
The following assumptions were made based on industry norms and case data:

The cost of capital (WACC) is assumed to be 10% for both regions, reflecting P&G’s
global risk-adjusted return expectations.

Terminal value is calculated using the perpetuity growth model with a terminal
growth rate of 3%.

Corporate tax rate is set at 30% in both markets for simplicity and consistency with
case standards.

Depreciation and capital expenditures are consistent and equal at $1 million per year.

COGS for China is 30% of revenue; for Europe, it is 35% based on case commentary.

All projections are in USD millions.
3- DCF ANALYSIS
All projections were extracted directly from the case and summarized below:
1-China Proposal
2-Europe Proposal
4- EVALUATION OF ECONOMIC VIABILITY AND STRATEGIC
ATTRACTIVENESS
Is the Project Economically Viable?
Yes, both proposed expansion projects — SK-II’s entry into China and the expansion into
Western Europe — are economically viable. This is demonstrated through a detailed fouryear Discounted Cash Flow (DCF) analysis for each project, based on realistic and industryaligned financial assumptions.


The Net Present Value (NPV) of the SK-II China expansion is $282.7 million.
The NPV of the SK-II Western Europe expansion is $115.3 million.
Given that both NPVs are positive and significantly above zero, the investments would
generate returns above the company’s cost of capital, indicating clear economic viability. The
internal rates of return (IRR) for both proposals, though not explicitly calculated, are
evidently higher than the assumed discount rate of 8%, further reinforcing their financial
attractiveness.
Which Strategic Proposal is Most Appealing?
Based on the DCF results and strategic fit, the SK-II Expansion into China emerges as the
more appealing investment option for Procter & Gamble. The reasons are multifold,
encompassing both quantitative financial metrics and qualitative market dynamics:
1. Superior NPV Performance:
The China project delivers a Net Present Value of $282.7 million, which is
approximately 145% higher than the NPV of the Europe expansion ($115.3 million).
This significant difference in value creation reflects stronger top-line growth
expectations, higher margins, and greater cash flow potential in the Chinese market.
2. Fast-Growing Skincare Market in China:
China represents one of the fastest-growing skincare and beauty markets globally.
Rising disposable income, a growing urban middle class, and increasing consumer
sophistication are key drivers of premium beauty product demand. SK-II’s positioning
as a high-end, science-backed skincare brand is well-aligned with these market trends.
3. First-Mover Advantage and Brand Loyalty:
Entering the Chinese market ahead of key competitors provides SK-II with a firstmover advantage, allowing it to build early brand equity and consumer loyalty. The
relative nascency of premium skincare penetration in China allows room for brand
storytelling, market education, and strong differentiation — core strengths of SK-II.
4. Strategic Alignment with SK-II’s Branding Philosophy:
SK-II’s brand identity is deeply rooted in education, aspirational marketing, and a
science-meets-beauty narrative. These elements resonate particularly well with
Chinese consumers, who are highly engaged online and responsive to brand
storytelling. Influencer partnerships, social commerce, and live-streaming — all
powerful tools in China — can amplify SK-II’s reach and consumer conversion.
5. Long-Term Growth Potential and Scalability:
Unlike Europe, which is a mature and highly competitive skincare market with slower
growth, China offers robust scalability. The opportunity to expand beyond Tier 1
cities into Tier 2 and Tier 3 cities provides long-term upside, while digital distribution
infrastructure in China supports efficient scale-up with lower operational costs.
APPENDIX A: FORMULAS USED
NO.
1
2
3
4
5
6
7
8
9
10
11
METRIC
Revenue
Cost of Goods Sold (COGS)
Operating Expenses
EBIT (Earnings Before
Interest & Tax)
Taxes
NOPAT (Net Operating Profit
After Tax)
Free Cash Flow (FCF)
Present Value of FCF
Terminal Value
Present Value of Terminal
Value
Net Present Value (NPV)
FORMULA
Revenue = Units Sold × Price per Unit
COGS = Revenue × COGS %
Operating Expenses = Revenue × Operating Expense %
EBIT = Revenue − COGS − Operating Expenses
Taxes = EBIT × Tax Rate
NOPAT = EBIT − Taxes
FCF = NOPAT − Capital Expenditure − Change in Net
Working Capital
PV of FCF = FCF / (1 + Discount Rate)^t
TV = Final Year FCF × (1 + g) / (Discount Rate − g)
PV of TV = Terminal Value / (1 + Discount Rate)^t
NPV = ∑ (PV of FCF for all years) + PV of Terminal
Value