Womenomics in Japan 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 Womenomics in Japan case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Womenomics in Japan case study is a Harvard Business School (HBR) case study written by Boris Groysberg, Mayuka Yamazaki, Nobuo Sato, David Lane. The Womenomics in Japan (referred as “Womenomics Abe” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Gender, Government, Labor, Leadership, Workspaces.

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 Womenomics in Japan Case Study

"Womenomics in Japan" profiles Prime Minister Shinzo Abe's vigorous attempts to revive Japan's economy, specifically by advocating for a larger role for women in the economy--not as a matter of social policy or gender equity per se, but as an essential element of any solution to Japan's persistent low economic growth. Several decades of economic stagnation led Abe to spearhead a multi-faceted reform effort to shake off deflation and come to grips with Japan's large national debt and rapidly aging society. "Womenomics"--the promotion of economic empowerment for women--has been a key element of this effort. Since taking office in late 2012, Abe has advocated for women in myriad ways: through sustained rhetoric at home and abroad, by naming women to key cabinet and party positions, and by setting ambitious numerical targets for expanding their professional ranks. To support these efforts at effecting institutional change, Abe also has overseen rapid growth in daycare facilities for the children of working mothers, and has worked intensively to encourage Japan's business associations to increase hiring, promotion, and empowerment of women among member firms. At issue is how effective such measures have been, and whether they can successfully be sustained.

Case Authors : Boris Groysberg, Mayuka Yamazaki, Nobuo Sato, David Lane

Topic : Organizational Development

Related Areas : Gender, Government, Labor, Leadership, Workspaces

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Calculating Net Present Value (NPV) at 6% for Womenomics in Japan Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10000314)	-10000314	-	-
Year 1	3449959	-6550355	3449959	0.9434	3254678
Year 2	3957182	-2593173	7407141	0.89	3521878
Year 3	3957447	1364274	11364588	0.8396	3322749
Year 4	3224137	4588411	14588725	0.7921	2553818
TOTAL			14588725		12653123

The Net Present Value at 6% discount rate is 2652809

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. Payback Period
2. Profitability Index
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 Womenomics Abe 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. Womenomics Abe 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 Womenomics in Japan

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 Womenomics Abe 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 Womenomics Abe 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	(10000314)	-10000314	-	-
Year 1	3449959	-6550355	3449959	0.8696	2999964
Year 2	3957182	-2593173	7407141	0.7561	2992198
Year 3	3957447	1364274	11364588	0.6575	2602086
Year 4	3224137	4588411	14588725	0.5718	1843411
TOTAL					10437659

The Net NPV after 4 years is 437345

(10437659 - 10000314 )

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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	(10000314)	-10000314	-	-
Year 1	3449959	-6550355	3449959	0.8333	2874966
Year 2	3957182	-2593173	7407141	0.6944	2748043
Year 3	3957447	1364274	11364588	0.5787	2290189
Year 4	3224137	4588411	14588725	0.4823	1554850
TOTAL					9468048

The Net NPV after 4 years is -532266

At 20% discount rate the NPV is negative (9468048 - 10000314 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Womenomics Abe 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 Womenomics Abe has a NPV value higher than Zero then finance managers at Womenomics Abe 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 Womenomics Abe, then the stock price of the Womenomics Abe 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 Womenomics Abe 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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

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 Womenomics in Japan

References & Further Readings

Boris Groysberg, Mayuka Yamazaki, Nobuo Sato, David Lane (2018), "Womenomics in Japan Harvard Business Review Case Study. Published by HBR Publications.