Clifford Chance: Women at Work, Spanish Version 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 Clifford Chance: Women at Work, Spanish Version case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Clifford Chance: Women at Work, Spanish Version case study is a Harvard Business School (HBR) case study written by Boris Groysberg, Katherine Connolly, Stephanie Marton. The Clifford Chance: Women at Work, Spanish Version (referred as “Sexist Clifford” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Conflict, Employee retention, Gender, Labor, Organizational culture, Public relations, Regulation, Work-life balance.

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 Clifford Chance: Women at Work, Spanish Version Case Study

It was October 2013, and global law firm Clifford Chance was coming under fire for the second time in less than a year for reputedly failing to provide a supportive work environment for its female associates. A memo entitled "Speaking Effectively" was just issued to the U.S. offices of the firm and immediately sparked controversy, as some female associates claimed that the gender-specific advice in the memo was condescending and sexist. This controversy came close on the heels of a memo released in November 2012, in which a third-year associate gave her resignation and explained why she was leaving the firm by detailing her unsustainable schedule as both a corporate lawyer and a mother to young children. Both memos were leaked on the internet, prompting bloggers, media outlets, and the public to chime in with their own opinions as to whether the firm was sexist. How should Clifford Chance have responded to these allegations? Was the firm sexist, or were things being taken out of context and blown out of proportion? If the firm determined that it needed to take heed and create a more inclusive culture that better met the needs of its female associates, where should it begin? Finally, how were the lessons learned in this case applicable to corporate America in 2014, where only 5.2% of Fortune 500 CEOs and 16.9% of board members in the United States were women?

Case Authors : Boris Groysberg, Katherine Connolly, Stephanie Marton

Topic : Organizational Development

Related Areas : Conflict, Employee retention, Gender, Labor, Organizational culture, Public relations, Regulation, Work-life balance

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Calculating Net Present Value (NPV) at 6% for Clifford Chance: Women at Work, Spanish Version Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10012260)	-10012260	-	-
Year 1	3443548	-6568712	3443548	0.9434	3248630
Year 2	3968409	-2600303	7411957	0.89	3531870
Year 3	3968022	1367719	11379979	0.8396	3331628
Year 4	3232505	4600224	14612484	0.7921	2560447
TOTAL			14612484		12672575

The Net Present Value at 6% discount rate is 2660315

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. 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. Sexist Clifford 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 Sexist Clifford have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Clifford Chance: Women at Work, Spanish Version

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 Sexist Clifford 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 Sexist Clifford 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	(10012260)	-10012260	-	-
Year 1	3443548	-6568712	3443548	0.8696	2994390
Year 2	3968409	-2600303	7411957	0.7561	3000687
Year 3	3968022	1367719	11379979	0.6575	2609039
Year 4	3232505	4600224	14612484	0.5718	1848195
TOTAL					10452311

The Net NPV after 4 years is 440051

(10452311 - 10012260 )

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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	(10012260)	-10012260	-	-
Year 1	3443548	-6568712	3443548	0.8333	2869623
Year 2	3968409	-2600303	7411957	0.6944	2755840
Year 3	3968022	1367719	11379979	0.5787	2296309
Year 4	3232505	4600224	14612484	0.4823	1558886
TOTAL					9480657

The Net NPV after 4 years is -531603

At 20% discount rate the NPV is negative (9480657 - 10012260 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Sexist Clifford 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 Sexist Clifford has a NPV value higher than Zero then finance managers at Sexist Clifford 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 Sexist Clifford, then the stock price of the Sexist Clifford 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 Sexist Clifford 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.

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.

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.

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Negotiation Strategy of Clifford Chance: Women at Work, Spanish Version

References & Further Readings

Boris Groysberg, Katherine Connolly, Stephanie Marton (2018), "Clifford Chance: Women at Work, Spanish Version Harvard Business Review Case Study. Published by HBR Publications.