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When and Who to Tell: The Long Goodbye 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 When and Who to Tell: The Long Goodbye case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. When and Who to Tell: The Long Goodbye case study is a Harvard Business School (HBR) case study written by Peter Tingling, Jonathan Tingling. The When and Who to Tell: The Long Goodbye (referred as “Accountant Employer” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Hiring.

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 When and Who to Tell: The Long Goodbye Case Study


In October 2015, a low-level staff accountant was suddenly ecstatic about his career prospects. The Chartered Professional Accountant recruitment process had been gruelling, but the end result made it all the more satisfying. After nearly two years of networking and getting to know firms while they closely evaluated him-and which concluded with seemingly endless interviews-the staff accountant had finally received job offers from his top choices. However, thrilled as he was with the result, he now faced a whole new challenge: what approach would he take to deliver the news to his current employer, where he planned to remain employed with for the next 11 months? Should he tell his employer immediately and risk termination and/or a tense work environment? Or should he keep it a secret as long as possible? Peter Tingling is affiliated with Simon Fraser University.


Case Authors : Peter Tingling, Jonathan Tingling

Topic : Organizational Development

Related Areas : Hiring




Calculating Net Present Value (NPV) at 6% for When and Who to Tell: The Long Goodbye Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10002997) -10002997 - -
Year 1 3463998 -6538999 3463998 0.9434 3267923
Year 2 3969279 -2569720 7433277 0.89 3532644
Year 3 3963523 1393803 11396800 0.8396 3327850
Year 4 3240310 4634113 14637110 0.7921 2566629
TOTAL 14637110 12695046




The Net Present Value at 6% discount rate is 2692049

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. 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 Accountant Employer 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. Accountant Employer 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 When and Who to Tell: The Long Goodbye

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 Accountant Employer 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 Accountant Employer 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 (10002997) -10002997 - -
Year 1 3463998 -6538999 3463998 0.8696 3012172
Year 2 3969279 -2569720 7433277 0.7561 3001345
Year 3 3963523 1393803 11396800 0.6575 2606081
Year 4 3240310 4634113 14637110 0.5718 1852658
TOTAL 10472256


The Net NPV after 4 years is 469259

(10472256 - 10002997 )








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 (10002997) -10002997 - -
Year 1 3463998 -6538999 3463998 0.8333 2886665
Year 2 3969279 -2569720 7433277 0.6944 2756444
Year 3 3963523 1393803 11396800 0.5787 2293705
Year 4 3240310 4634113 14637110 0.4823 1562649
TOTAL 9499464


The Net NPV after 4 years is -503533

At 20% discount rate the NPV is negative (9499464 - 10002997 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Accountant Employer 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 Accountant Employer has a NPV value higher than Zero then finance managers at Accountant Employer 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 Accountant Employer, then the stock price of the Accountant Employer 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 Accountant Employer 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 –

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.

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.

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.






Negotiation Strategy of When and Who to Tell: The Long Goodbye

References & Further Readings

Peter Tingling, Jonathan Tingling (2018), "When and Who to Tell: The Long Goodbye Harvard Business Review Case Study. Published by HBR Publications.


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