Corporate Solutions at Jones Lang LaSalle (2001) 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 Corporate Solutions at Jones Lang LaSalle (2001) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Corporate Solutions at Jones Lang LaSalle (2001) case study is a Harvard Business School (HBR) case study written by Ranjay Gulati, Lucia Marshall. The Corporate Solutions at Jones Lang LaSalle (2001) (referred as “Barge Lasalle” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Organizational structure, Reorganization, Strategy.

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 Corporate Solutions at Jones Lang LaSalle (2001) Case Study

Peter Barge, CEO of the newly created Corporate Solutions Group of Jones Lang LaSalle (JLL), is executing a restructuring of the U.S. corporate real estate services division that will enable the company to offer its clients integrated solutions. Barge has created an account management function to coordinate the activities of the three, product-based business units which, until now, have operated autonomously. As he is executing the restructuring, Bank of America, an important account of the firm, announces its intention to reduce its providers to the two or three who can offer forward-looking, integrated services. While Barge's new organization is not yet fully in place, he is determined to win the Bank of America business, and moves quickly to hire a senior account manager and establish an organizational architecture that will encourage collaboration within his group. The case examines the many tradeoffs Barge must make in balancing the benefits of the former organization with those of the new structure to achieve the firm's strategic goal of becoming more customer solutions oriented.

Case Authors : Ranjay Gulati, Lucia Marshall

Topic : Organizational Development

Related Areas : Organizational structure, Reorganization, Strategy

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Calculating Net Present Value (NPV) at 6% for Corporate Solutions at Jones Lang LaSalle (2001) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10026010)	-10026010	-	-
Year 1	3451265	-6574745	3451265	0.9434	3255910
Year 2	3968489	-2606256	7419754	0.89	3531941
Year 3	3940620	1334364	11360374	0.8396	3308621
Year 4	3226785	4561149	14587159	0.7921	2555916
TOTAL			14587159		12652388

The Net Present Value at 6% discount rate is 2626378

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. Payback Period
3. Profitability Index
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 Barge Lasalle 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. Barge Lasalle 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 Corporate Solutions at Jones Lang LaSalle (2001)

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 Barge Lasalle 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 Barge Lasalle 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	(10026010)	-10026010	-	-
Year 1	3451265	-6574745	3451265	0.8696	3001100
Year 2	3968489	-2606256	7419754	0.7561	3000748
Year 3	3940620	1334364	11360374	0.6575	2591022
Year 4	3226785	4561149	14587159	0.5718	1844925
TOTAL					10437794

The Net NPV after 4 years is 411784

(10437794 - 10026010 )

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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	(10026010)	-10026010	-	-
Year 1	3451265	-6574745	3451265	0.8333	2876054
Year 2	3968489	-2606256	7419754	0.6944	2755895
Year 3	3940620	1334364	11360374	0.5787	2280451
Year 4	3226785	4561149	14587159	0.4823	1556127
TOTAL					9468528

The Net NPV after 4 years is -557482

At 20% discount rate the NPV is negative (9468528 - 10026010 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Barge Lasalle 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 Barge Lasalle has a NPV value higher than Zero then finance managers at Barge Lasalle 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 Barge Lasalle, then the stock price of the Barge Lasalle 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 Barge Lasalle 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 can impact the cash flow of the project.

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

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.

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 Corporate Solutions at Jones Lang LaSalle (2001)

References & Further Readings

Ranjay Gulati, Lucia Marshall (2018), "Corporate Solutions at Jones Lang LaSalle (2001) Harvard Business Review Case Study. Published by HBR Publications.