Crown Worldwide: Integrating Corporate Social Responsibility in Business 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 Crown Worldwide: Integrating Corporate Social Responsibility in Business case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Crown Worldwide: Integrating Corporate Social Responsibility in Business case study is a Harvard Business School (HBR) case study written by Ali Farhoomand, Ricky Lai, Claudia H. L. Woo. The Crown Worldwide: Integrating Corporate Social Responsibility in Business (referred as “Csr Crown” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Corporate governance, Economic development, Ethics, Leadership, Social responsibility.

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 Crown Worldwide: Integrating Corporate Social Responsibility in Business Case Study

Founded in 1965 by Jim Thompson, the Crown Worldwide Group ("Crown") began as a small moving company in Japan, shifting its headquarters to Hong Kong in the mid-1970s. Within 30 years, Crown had became the world's largest privately held relocation and logistics enterprise, a success that was attributed primarily to the founder's insistence on high service quality and unwavering commitment to community development. With growing concern among customers about CSR, the company recognized that CSR must be integrated into its corporate strategy and day-to-day business operations to achieve sustainability for both the company and society. In 2008, Crown appointed its first CSR director, whose primary task was to develop and implement a standardized global CSR strategy that would support Crown's environmental and community development initiatives. Various CSR integration steps were taken, such as developing global environmental standards, stimulating employee volunteerism, building CSR communication channels, developing a supplier management system and conducting CSR measurement. In line with the goals of the UN Global Compact-a leadership initiative that guided participants in practicing responsible business-Crown would also publish sustainability reports yearly. Although employees were supportive of the company's CSR efforts, the journey of becoming a well rounded corporate citizen is full of complexities and involves a wide range of stakeholders and multi-dimensional issues. Without a roadmap or framework, CSR integration efforts could be daunting, but inaction is no longer an option in light of increasing CSR expectations. What would be the key success factors for Crown's CSR integration?

Case Authors : Ali Farhoomand, Ricky Lai, Claudia H. L. Woo

Topic : Organizational Development

Related Areas : Corporate governance, Economic development, Ethics, Leadership, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Crown Worldwide: Integrating Corporate Social Responsibility in Business Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10022084)	-10022084	-	-
Year 1	3462213	-6559871	3462213	0.9434	3266239
Year 2	3967407	-2592464	7429620	0.89	3530978
Year 3	3943549	1351085	11373169	0.8396	3311080
Year 4	3248454	4599539	14621623	0.7921	2573080
TOTAL			14621623		12681376

The Net Present Value at 6% discount rate is 2659292

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. Timing of the expected cash flows – stockholders of Csr Crown 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. Csr Crown 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 Crown Worldwide: Integrating Corporate Social Responsibility in Business

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 Csr Crown 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 Csr Crown 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	(10022084)	-10022084	-	-
Year 1	3462213	-6559871	3462213	0.8696	3010620
Year 2	3967407	-2592464	7429620	0.7561	2999930
Year 3	3943549	1351085	11373169	0.6575	2592947
Year 4	3248454	4599539	14621623	0.5718	1857314
TOTAL					10460811

The Net NPV after 4 years is 438727

(10460811 - 10022084 )

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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	(10022084)	-10022084	-	-
Year 1	3462213	-6559871	3462213	0.8333	2885178
Year 2	3967407	-2592464	7429620	0.6944	2755144
Year 3	3943549	1351085	11373169	0.5787	2282146
Year 4	3248454	4599539	14621623	0.4823	1566577
TOTAL					9489045

The Net NPV after 4 years is -533039

At 20% discount rate the NPV is negative (9489045 - 10022084 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Csr Crown 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 Csr Crown has a NPV value higher than Zero then finance managers at Csr Crown 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 Csr Crown, then the stock price of the Csr Crown 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 Csr Crown 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 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.

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.

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 Crown Worldwide: Integrating Corporate Social Responsibility in Business

References & Further Readings

Ali Farhoomand, Ricky Lai, Claudia H. L. Woo (2018), "Crown Worldwide: Integrating Corporate Social Responsibility in Business Harvard Business Review Case Study. Published by HBR Publications.