RESTORING THE BRITISH MUSEUM 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 RESTORING THE BRITISH MUSEUM case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. RESTORING THE BRITISH MUSEUM case study is a Harvard Business School (HBR) case study written by Anand Narasimhan, Jean-Louis Barsoux. The RESTORING THE BRITISH MUSEUM (referred as “Bm Macgregor” 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, Customer service, Influence, Leadership, Networking, Operations management, Strategy.

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 RESTORING THE BRITISH MUSEUM Case Study

This is an unusual turnaround case in that it involves a public sector institution, the British Museum (BM). The case study covers the period from around 1999 to 2010. It focuses more particularly on the arrival of Neil MacGregor, in August 2002, as the new director of the museum. When he took over, the BM was one year short of its 250th anniversary.It was also in debt and out of fashion. It had acquired a reputation as "one of the least user-friendly museums in the world." One senior figure from the museum was even quoted as saying that he didn't want children in there. Compared to rival venues, visiting the BM was like a "trip back in time" - but not in a favorable sense. In the space of nine years, MacGregor reversed its fortunes and restored its sense of pride and purpose. He raised its profile through engaging exhibitions, television shows and the Internet - but most surprisingly of all through the use of radio. He presided over a startling transformation in the image and fortunes of the BM, with net income quadrupling in nine years and donations and legacies growing eight-fold under his watch. Visitor numbers reached record highs and the BM has become a template for other museums. A cultural institution that was once in danger of becoming an embarrassing monument to British imperialism is now viewed with pride. As one commentator put it: "As an exercise in rebranding, it is surely up there with the best." The case considers the methods used by MacGregor to achieve these results and some of the key turning points, as well as the lessons for other organizations, including in the private sector. It also explores the possible complications of following a charismatic leader. Learning objectives: The case covers six key issues to do with leadership and organizational change: 1) The difficulties of changing an entrenched public sector culture, shaped by curatorial divisions and the weight of the BM's heritage. 2) The challenge of managing multiple stakeholders. 3) The various roles adopted by a leader - and changing the scope of the job. 4) The importance of finding a purpose that resonates with employees and visitors alike. 5) The process of institutional transformation and the challenge of building on MacGregor's legacy. 6) The benefits and drawbacks of charismatic leadership.

Case Authors : Anand Narasimhan, Jean-Louis Barsoux

Topic : Leadership & Managing People

Related Areas : Customer service, Influence, Leadership, Networking, Operations management, Strategy

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Calculating Net Present Value (NPV) at 6% for RESTORING THE BRITISH MUSEUM Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10008208)	-10008208	-	-
Year 1	3456352	-6551856	3456352	0.9434	3260709
Year 2	3960666	-2591190	7417018	0.89	3524979
Year 3	3951546	1360356	11368564	0.8396	3317794
Year 4	3225290	4585646	14593854	0.7921	2554732
TOTAL			14593854		12658214

The Net Present Value at 6% discount rate is 2650006

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. Net Present Value
2. Payback Period
3. Internal Rate of Return
4. Profitability Index

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 Bm Macgregor 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. Bm Macgregor shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of RESTORING THE BRITISH MUSEUM

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 Bm Macgregor 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 Bm Macgregor 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	(10008208)	-10008208	-	-
Year 1	3456352	-6551856	3456352	0.8696	3005523
Year 2	3960666	-2591190	7417018	0.7561	2994833
Year 3	3951546	1360356	11368564	0.6575	2598206
Year 4	3225290	4585646	14593854	0.5718	1844070
TOTAL					10442632

The Net NPV after 4 years is 434424

(10442632 - 10008208 )

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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	(10008208)	-10008208	-	-
Year 1	3456352	-6551856	3456352	0.8333	2880293
Year 2	3960666	-2591190	7417018	0.6944	2750463
Year 3	3951546	1360356	11368564	0.5787	2286774
Year 4	3225290	4585646	14593854	0.4823	1555406
TOTAL					9472936

The Net NPV after 4 years is -535272

At 20% discount rate the NPV is negative (9472936 - 10008208 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Bm Macgregor 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 Bm Macgregor has a NPV value higher than Zero then finance managers at Bm Macgregor 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 Bm Macgregor, then the stock price of the Bm Macgregor 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 Bm Macgregor 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.

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.

Understanding of risks involved in the project.

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

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.

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Negotiation Strategy of RESTORING THE BRITISH MUSEUM

References & Further Readings

Anand Narasimhan, Jean-Louis Barsoux (2018), "RESTORING THE BRITISH MUSEUM Harvard Business Review Case Study. Published by HBR Publications.