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Gregg Popovich and the San Antonio Spurs 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 Gregg Popovich and the San Antonio Spurs case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Gregg Popovich and the San Antonio Spurs case study is a Harvard Business School (HBR) case study written by Michael Sider. The Gregg Popovich and the San Antonio Spurs (referred as “Spurs Nba” 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, Organizational culture.

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 Gregg Popovich and the San Antonio Spurs Case Study


Greg Popovich, head coach of the National Basketball Association's (NBA) San Antonio Spurs (Spurs), decides to rest his three aging star players during a highly-anticipated game against the NBA champion Miami Heat (Heat). Miami fans have paid a premium for tickets to the game. Many intend to bring their children to see the young, upstart Heat face the much older, but still highly-competitive Spurs. This is a Thursday night game, nationally-televised by the important sponsor of the NBA, TNT. Not to have the Spurs' stars in the game is very disappointing to fans and to the NBA itself. Popovich needs to decide whether it's right to rest his players, and what to say to the fans and to the NBA.


Case Authors : Michael Sider

Topic : Leadership & Managing People

Related Areas : Organizational culture




Calculating Net Present Value (NPV) at 6% for Gregg Popovich and the San Antonio Spurs Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10008574) -10008574 - -
Year 1 3471802 -6536772 3471802 0.9434 3275285
Year 2 3971128 -2565644 7442930 0.89 3534290
Year 3 3967559 1401915 11410489 0.8396 3331239
Year 4 3247190 4649105 14657679 0.7921 2572079
TOTAL 14657679 12712892




The Net Present Value at 6% discount rate is 2704318

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. Profitability Index
2. Payback Period
3. Net Present Value
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Spurs Nba shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Spurs Nba have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Gregg Popovich and the San Antonio Spurs

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 Spurs Nba 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 Spurs Nba 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 (10008574) -10008574 - -
Year 1 3471802 -6536772 3471802 0.8696 3018958
Year 2 3971128 -2565644 7442930 0.7561 3002743
Year 3 3967559 1401915 11410489 0.6575 2608734
Year 4 3247190 4649105 14657679 0.5718 1856591
TOTAL 10487027


The Net NPV after 4 years is 478453

(10487027 - 10008574 )








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 (10008574) -10008574 - -
Year 1 3471802 -6536772 3471802 0.8333 2893168
Year 2 3971128 -2565644 7442930 0.6944 2757728
Year 3 3967559 1401915 11410489 0.5787 2296041
Year 4 3247190 4649105 14657679 0.4823 1565967
TOTAL 9512905


The Net NPV after 4 years is -495669

At 20% discount rate the NPV is negative (9512905 - 10008574 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Spurs Nba 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 Spurs Nba has a NPV value higher than Zero then finance managers at Spurs Nba 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 Spurs Nba, then the stock price of the Spurs Nba 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 Spurs Nba 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 –

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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 Gregg Popovich and the San Antonio Spurs

References & Further Readings

Michael Sider (2018), "Gregg Popovich and the San Antonio Spurs Harvard Business Review Case Study. Published by HBR Publications.


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