"The Tipping Point" and Green Dot Public Schools 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 "The Tipping Point" and Green Dot Public Schools case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. "The Tipping Point" and Green Dot Public Schools case study is a Harvard Business School (HBR) case study written by Victoria Chang, Debra Meyerson. The "The Tipping Point" and Green Dot Public Schools (referred as “Barr Percent” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, .

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 "The Tipping Point" and Green Dot Public Schools Case Study

Green Dot was a charter management organization (CMO) based in Los Angeles, California (L.A.), a city that housed the second-largest school district in the country. The Los Angeles Unified School District (LAUSD) was known for its largely ethnic student population (75 percent Hispanic and 11 percent African American) and multiple challenges ranging from poor performance to violence to low graduation rates. High school graduation rates in the district were only 45 percent (compared to 68 percent nationally), with Hispanic students graduating at a rate of only 39 percent. Gary Orfield of the Harvard Civil Rights Project called the city's high schools "dropout factories." By 2008, Green Dot had opened 12 charter high schools in some of the highest-need areas of L.A., hoping to demonstrate "that public schools can do a far better job of educating students if schools are operated more effectively." Founder, Steve Barr and his team had their own ideas about the tipping point and its metrics, which were both quantitative (e.g., 10 percent market share of schools within LAUSD) and qualitative, in terms of gains in political influence. As Barr and his Green Dot team worked towards opening of new school, Locke in the fall of 2008, Barr was both nervous and optimistic. He knew the future of Los Angeles students, parents, and their communities depended on the success of his team. He wondered if his new transformation strategy was the optimal strategy. He also wondered if his thinking about the tipping point would give him and his team the best chance for success.

Case Authors : Victoria Chang, Debra Meyerson

Topic : Organizational Development

Related Areas :

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Calculating Net Present Value (NPV) at 6% for "The Tipping Point" and Green Dot Public Schools Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009773)	-10009773	-	-
Year 1	3468516	-6541257	3468516	0.9434	3272185
Year 2	3975497	-2565760	7444013	0.89	3538178
Year 3	3951436	1385676	11395449	0.8396	3317702
Year 4	3239889	4625565	14635338	0.7921	2566296
TOTAL			14635338		12694360

The Net Present Value at 6% discount rate is 2684587

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

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 Barr Percent 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. Barr Percent 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 "The Tipping Point" and Green Dot Public Schools

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 Organizational Development 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 Barr Percent 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 Barr Percent 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	(10009773)	-10009773	-	-
Year 1	3468516	-6541257	3468516	0.8696	3016101
Year 2	3975497	-2565760	7444013	0.7561	3006047
Year 3	3951436	1385676	11395449	0.6575	2598133
Year 4	3239889	4625565	14635338	0.5718	1852417
TOTAL					10472698

The Net NPV after 4 years is 462925

(10472698 - 10009773 )

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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	(10009773)	-10009773	-	-
Year 1	3468516	-6541257	3468516	0.8333	2890430
Year 2	3975497	-2565760	7444013	0.6944	2760762
Year 3	3951436	1385676	11395449	0.5787	2286711
Year 4	3239889	4625565	14635338	0.4823	1562446
TOTAL					9500349

The Net NPV after 4 years is -509424

At 20% discount rate the NPV is negative (9500349 - 10009773 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Barr Percent 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 Barr Percent has a NPV value higher than Zero then finance managers at Barr Percent 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 Barr Percent, then the stock price of the Barr Percent 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 Barr Percent 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 can impact the cash flow of the project.

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

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 "The Tipping Point" and Green Dot Public Schools

References & Further Readings

Victoria Chang, Debra Meyerson (2018), ""The Tipping Point" and Green Dot Public Schools Harvard Business Review Case Study. Published by HBR Publications.