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A Dean's Dilemma: Selection of Students for the MBA Program 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 A Dean's Dilemma: Selection of Students for the MBA Program case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. A Dean's Dilemma: Selection of Students for the MBA Program case study is a Harvard Business School (HBR) case study written by Dhimant Ganatra, Dinesh Kumar Unnikrishnan. The A Dean's Dilemma: Selection of Students for the MBA Program (referred as “Admitted Mba” 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, Decision making, Financial analysis.

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 A Dean's Dilemma: Selection of Students for the MBA Program Case Study


Easwaran Iyer, Dean of the Jain University's Business School, wanted to ensure that they admitted the right set of students to their Master of Business Administration (MBA) program, but he was not sure about the parameters that could be used to identify students who were ideal for the MBA program. Jain University received applications for the MBA program from across India and admitted approximately 400 students every year. There had been a steady increase in the number of applications received by Jain University over the years. Placement performance played a major role in attracting good quality students to the MBA program in India. In 2012, over 180 Business Schools in major cities such as Delhi, Mumbai, Bangalore, Ahmedabad, Kolkata, Lucknow, and Dehradun closed down. Although, there could be many reasons for their closure, their inability to place their students played a key role. At the beginning of every admissions season, which began in April and stretched until July, Iyer thoroughly screened the admission seeking candidates and decided along with his admission committee which of candidates were admitted or rejected. Although there was no penalty if a non-placeable student was selected, it would weigh heavily on the institute's reputation. A wrong pick could eventually contribute towards an increase in the number of unplaced students as well as a reduction in the average salary. Moreover, there was the possibility of rejecting a placeable candidate. What made Iyer's job tougher was that he was expected to increase the batch size while also increasing the quality of the admitted set of students. He acknowledged that MBA admissions needed much more analytical reasoning, taking multiple criteria into consideration.


Case Authors : Dhimant Ganatra, Dinesh Kumar Unnikrishnan

Topic : Leadership & Managing People

Related Areas : Decision making, Financial analysis




Calculating Net Present Value (NPV) at 6% for A Dean's Dilemma: Selection of Students for the MBA Program Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10018410) -10018410 - -
Year 1 3460600 -6557810 3460600 0.9434 3264717
Year 2 3954941 -2602869 7415541 0.89 3519883
Year 3 3973538 1370669 11389079 0.8396 3336259
Year 4 3242703 4613372 14631782 0.7921 2568524
TOTAL 14631782 12689384




The Net Present Value at 6% discount rate is 2670974

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. Internal Rate of Return
2. Payback Period
3. Net Present Value
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 Admitted Mba 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. Admitted Mba shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.






Formula and Steps to Calculate Net Present Value (NPV) of A Dean's Dilemma: Selection of Students for the MBA Program

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 Admitted Mba 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 Admitted Mba 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 (10018410) -10018410 - -
Year 1 3460600 -6557810 3460600 0.8696 3009217
Year 2 3954941 -2602869 7415541 0.7561 2990504
Year 3 3973538 1370669 11389079 0.6575 2612666
Year 4 3242703 4613372 14631782 0.5718 1854026
TOTAL 10466413


The Net NPV after 4 years is 448003

(10466413 - 10018410 )








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 (10018410) -10018410 - -
Year 1 3460600 -6557810 3460600 0.8333 2883833
Year 2 3954941 -2602869 7415541 0.6944 2746487
Year 3 3973538 1370669 11389079 0.5787 2299501
Year 4 3242703 4613372 14631782 0.4823 1563804
TOTAL 9493625


The Net NPV after 4 years is -524785

At 20% discount rate the NPV is negative (9493625 - 10018410 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Admitted Mba 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 Admitted Mba has a NPV value higher than Zero then finance managers at Admitted Mba 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 Admitted Mba, then the stock price of the Admitted Mba 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 Admitted Mba 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 will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

Understanding of risks involved in the project.

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.

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 A Dean's Dilemma: Selection of Students for the MBA Program

References & Further Readings

Dhimant Ganatra, Dinesh Kumar Unnikrishnan (2018), "A Dean's Dilemma: Selection of Students for the MBA Program Harvard Business Review Case Study. Published by HBR Publications.


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