The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd 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 The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd case study is a Harvard Business School (HBR) case study written by William A. Fischer, Rebecca Chung. The The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd (referred as “Talent China” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Talent management.

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 The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd Case Study

This case is part of the suite of teaching materials which employs China as an illustration of the managerial implications resulted from the so-called War for Talent, and is intended to generate insights into "how to best play the talent game" in China, or elsewhere. We aim to generate an interactive and rich class discussion of the issues raised among seasoned business practitioners, by adopting a variety of interesting teaching formats: an opening note, four cases, an "appraisal exercise" and a video. In particular, this case features a state-controlled listed company which is a horizontally-diversified national champion involved in such business categories as tires, batteries, soap, printing ink and real estate, with export sales accounting for 45% of its total sales. The company aspires to increase its international presence and, in particular, to turn its tire operations into "global factories," while building its "Double Coin" domestic brand into a global one. The enterprise's board chairman, Dr Fan Xian, needs experienced managers for its domestic and overseas operations, especially in the areas of general management, finance, and marketing and sales. To him, loyalty is the most important criteria when appraising job candidates. His challenge is to find loyal and competent managers and match them with the right positions in China and overseas. Learning objectives: Among the critical issues in talent management to be addressed in this suite of teaching materials, the following are the most central for the learning of class participants: Since sizing up potential candidates is the first and most fundamental step of talent management, what characteristics should a business leader look for to meet the competency requirements today and to prepare for the future? What would be some creative and feasible practices to source, attract, develop and retain management talent?

Case Authors : William A. Fischer, Rebecca Chung

Topic : Organizational Development

Related Areas : Talent management

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Calculating Net Present Value (NPV) at 6% for The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10025927)	-10025927	-	-
Year 1	3467392	-6558535	3467392	0.9434	3271125
Year 2	3971583	-2586952	7438975	0.89	3534695
Year 3	3966507	1379555	11405482	0.8396	3330356
Year 4	3250574	4630129	14656056	0.7921	2574759
TOTAL			14656056		12710934

The Net Present Value at 6% discount rate is 2685007

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. Talent China 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 Talent China 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 The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd

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 Talent China 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 Talent China 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	(10025927)	-10025927	-	-
Year 1	3467392	-6558535	3467392	0.8696	3015123
Year 2	3971583	-2586952	7438975	0.7561	3003087
Year 3	3966507	1379555	11405482	0.6575	2608043
Year 4	3250574	4630129	14656056	0.5718	1858526
TOTAL					10484780

The Net NPV after 4 years is 458853

(10484780 - 10025927 )

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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	(10025927)	-10025927	-	-
Year 1	3467392	-6558535	3467392	0.8333	2889493
Year 2	3971583	-2586952	7438975	0.6944	2758044
Year 3	3966507	1379555	11405482	0.5787	2295432
Year 4	3250574	4630129	14656056	0.4823	1567599
TOTAL					9510569

The Net NPV after 4 years is -515358

At 20% discount rate the NPV is negative (9510569 - 10025927 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Talent China 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 Talent China has a NPV value higher than Zero then finance managers at Talent China 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 Talent China, then the stock price of the Talent China 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 Talent China 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.

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.

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 The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd

References & Further Readings

William A. Fischer, Rebecca Chung (2018), "The War for Management Talent in China: Shanghai Tyre & Rubber Co. Ltd Harvard Business Review Case Study. Published by HBR Publications.