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Maple Retreat Golf and Country Club 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 Maple Retreat Golf and Country Club case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Maple Retreat Golf and Country Club case study is a Harvard Business School (HBR) case study written by Lyn Purdy, Stephen Rene Frey. The Maple Retreat Golf and Country Club (referred as “Candidates Club” 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, Human resource management.

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 Maple Retreat Golf and Country Club Case Study


This case is set at a golf course in Aurora, Ontario. The club superintendent and the assistant superintendent will be interviewing three candidates for a green keeping position at Maple Retreat Golf and Country Club. The club superintendent must decide what questions to ask of the three applicants, keeping in mind what questions he could not ask of the candidates. This case is intended to be used for the managing people module of an organizational behavior or human resource management core course, or for a managing people elective. The case provides students with the opportunity to develop interview questions for the candidates and to interview the candidates in role play situations.


Case Authors : Lyn Purdy, Stephen Rene Frey

Topic : Leadership & Managing People

Related Areas : Human resource management




Calculating Net Present Value (NPV) at 6% for Maple Retreat Golf and Country Club Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10015847) -10015847 - -
Year 1 3460670 -6555177 3460670 0.9434 3264783
Year 2 3979058 -2576119 7439728 0.89 3541347
Year 3 3939663 1363544 11379391 0.8396 3307817
Year 4 3236918 4600462 14616309 0.7921 2563942
TOTAL 14616309 12677890




The Net Present Value at 6% discount rate is 2662043

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. Net Present Value
2. Payback Period
3. Profitability Index
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. Candidates Club 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 Candidates Club 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 Maple Retreat Golf and Country Club

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 Candidates Club 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 Candidates Club 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 (10015847) -10015847 - -
Year 1 3460670 -6555177 3460670 0.8696 3009278
Year 2 3979058 -2576119 7439728 0.7561 3008740
Year 3 3939663 1363544 11379391 0.6575 2590392
Year 4 3236918 4600462 14616309 0.5718 1850718
TOTAL 10459129


The Net NPV after 4 years is 443282

(10459129 - 10015847 )








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 (10015847) -10015847 - -
Year 1 3460670 -6555177 3460670 0.8333 2883892
Year 2 3979058 -2576119 7439728 0.6944 2763235
Year 3 3939663 1363544 11379391 0.5787 2279898
Year 4 3236918 4600462 14616309 0.4823 1561014
TOTAL 9488038


The Net NPV after 4 years is -527809

At 20% discount rate the NPV is negative (9488038 - 10015847 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Candidates Club 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 Candidates Club has a NPV value higher than Zero then finance managers at Candidates Club 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 Candidates Club, then the stock price of the Candidates Club 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 Candidates Club 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 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 can impact the cash flow of the project.

Understanding of risks involved in the project.

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

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

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 Maple Retreat Golf and Country Club

References & Further Readings

Lyn Purdy, Stephen Rene Frey (2018), "Maple Retreat Golf and Country Club Harvard Business Review Case Study. Published by HBR Publications.


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