Community Health Workers in Zambia: Incentive Design and Management 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 Community Health Workers in Zambia: Incentive Design and Management case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Community Health Workers in Zambia: Incentive Design and Management case study is a Harvard Business School (HBR) case study written by Nava Ashraf, Natalie Kindred. The Community Health Workers in Zambia: Incentive Design and Management (referred as “Moh Zambia” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Emerging markets, Health, Motivating people, Talent 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

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Case Description of Community Health Workers in Zambia: Incentive Design and Management Case Study

This case examines the various considerations relevant to selecting and compensating workers in a context where their work involves a pro-social component. This is relevant to not only health care in Zambia, but to NGO and public sector workers who are both motivated by the mission of their positions and the remuneration. Zambia was facing a healthcare human resource crisis with less than half of the healthcare workers needed to meet health needs. Yet, it was simultaneously burdened by high incidence of diseases such as HIV/AIDS, TB, malaria, malnutrition, and respiratory and diarrheal diseases. The Zambian Ministry of Health (MoH) realized that in the short term, it would be impossible to train the number of doctors and nurses needed to fill this gap. Thus, they were considering incorporating the primarily volunteer community health worker (CHW) force into salaried health workers of the MoH. Given the high level of personal commitment and dedication combined with the proper education and skill needed to be an effective community health worker, the MoH was struggling to identify the best strategy to recruit and retain motivated and capable CHWs.

Case Authors : Nava Ashraf, Natalie Kindred

Topic : Organizational Development

Related Areas : Emerging markets, Health, Motivating people, Talent management

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Calculating Net Present Value (NPV) at 6% for Community Health Workers in Zambia: Incentive Design and Management Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10028203)	-10028203	-	-
Year 1	3468316	-6559887	3468316	0.9434	3271996
Year 2	3963694	-2596193	7432010	0.89	3527674
Year 3	3948615	1352422	11380625	0.8396	3315333
Year 4	3248557	4600979	14629182	0.7921	2573161
TOTAL			14629182		12688164

The Net Present Value at 6% discount rate is 2659961

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. Net Present Value
3. Profitability Index
4. Payback Period

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 Moh Zambia 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. Moh Zambia 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 Community Health Workers in Zambia: Incentive Design and Management

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 Moh Zambia 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 Moh Zambia 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	(10028203)	-10028203	-	-
Year 1	3468316	-6559887	3468316	0.8696	3015927
Year 2	3963694	-2596193	7432010	0.7561	2997122
Year 3	3948615	1352422	11380625	0.6575	2596278
Year 4	3248557	4600979	14629182	0.5718	1857373
TOTAL					10466701

The Net NPV after 4 years is 438498

(10466701 - 10028203 )

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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	(10028203)	-10028203	-	-
Year 1	3468316	-6559887	3468316	0.8333	2890263
Year 2	3963694	-2596193	7432010	0.6944	2752565
Year 3	3948615	1352422	11380625	0.5787	2285078
Year 4	3248557	4600979	14629182	0.4823	1566627
TOTAL					9494533

The Net NPV after 4 years is -533670

At 20% discount rate the NPV is negative (9494533 - 10028203 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Moh Zambia 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 Moh Zambia has a NPV value higher than Zero then finance managers at Moh Zambia 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 Moh Zambia, then the stock price of the Moh Zambia 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 Moh Zambia 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.

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.

Understanding of risks involved in 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 Community Health Workers in Zambia: Incentive Design and Management

References & Further Readings

Nava Ashraf, Natalie Kindred (2018), "Community Health Workers in Zambia: Incentive Design and Management Harvard Business Review Case Study. Published by HBR Publications.