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Fei Ni Mo Shu (You are the One) and the Chinese Employment Market 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 Fei Ni Mo Shu (You are the One) and the Chinese Employment Market case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Fei Ni Mo Shu (You are the One) and the Chinese Employment Market case study is a Harvard Business School (HBR) case study written by Christopher Marquis, Qi Li, Ying Zhang. The Fei Ni Mo Shu (You are the One) and the Chinese Employment Market (referred as “Shu Ni” 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 culture.

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




Case Description of Fei Ni Mo Shu (You are the One) and the Chinese Employment Market Case Study


This case study shows the evolution of the Chinese television program Fei Ni Mo Shu (You are the One), from an unrecognized show in 2010 to becoming a television phenomenon in 2015. The success of Fei Ni Mo Shu (You are the One) has resulted from it reflecting the current Chinese labor market, people's career attitudes and what Chinese employers demand from the employees. As Fei Ni Mo Shu enters its sixth year, the show's producer grapples with questions of how to keep the show fresh and appealing as the underlying social and economic conditions that led to its success change.


Case Authors : Christopher Marquis, Qi Li, Ying Zhang

Topic : Organizational Development

Related Areas : Organizational culture




Calculating Net Present Value (NPV) at 6% for Fei Ni Mo Shu (You are the One) and the Chinese Employment Market Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10008468) -10008468 - -
Year 1 3448847 -6559621 3448847 0.9434 3253629
Year 2 3973152 -2586469 7421999 0.89 3536091
Year 3 3957567 1371098 11379566 0.8396 3322850
Year 4 3246347 4617445 14625913 0.7921 2571411
TOTAL 14625913 12683981


The Net Present Value at 6% discount rate is 2675513

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.




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. Internal Rate of Return
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 Shu Ni 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. Shu Ni shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.




Formula and Steps to Calculate Net Present Value (NPV) of Fei Ni Mo Shu (You are the One) and the Chinese Employment Market

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 Shu Ni 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 Shu Ni 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 (10008468) -10008468 - -
Year 1 3448847 -6559621 3448847 0.8696 2998997
Year 2 3973152 -2586469 7421999 0.7561 3004274
Year 3 3957567 1371098 11379566 0.6575 2602165
Year 4 3246347 4617445 14625913 0.5718 1856109
TOTAL 10461545


The Net NPV after 4 years is 453077

(10461545 - 10008468 )






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 (10008468) -10008468 - -
Year 1 3448847 -6559621 3448847 0.8333 2874039
Year 2 3973152 -2586469 7421999 0.6944 2759133
Year 3 3957567 1371098 11379566 0.5787 2290259
Year 4 3246347 4617445 14625913 0.4823 1565561
TOTAL 9488992


The Net NPV after 4 years is -519476

At 20% discount rate the NPV is negative (9488992 - 10008468 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Shu Ni 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 Shu Ni has a NPV value higher than Zero then finance managers at Shu Ni 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 Shu Ni, then the stock price of the Shu Ni 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 Shu Ni 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 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.

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.




References & Further Readings

Christopher Marquis, Qi Li, Ying Zhang (2018), "Fei Ni Mo Shu (You are the One) and the Chinese Employment Market Harvard Business Review Case Study. Published by HBR Publications.