Brookfield Properties: Crisis Leadership Following September 11th, 2001 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 Brookfield Properties: Crisis Leadership Following September 11th, 2001 case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Brookfield Properties: Crisis Leadership Following September 11th, 2001 case study is a Harvard Business School (HBR) case study written by Kathleen E. Slaughter, Elizabeth O'Neil. The Brookfield Properties: Crisis Leadership Following September 11th, 2001 (referred as “Brookfield Properties” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Crisis management, Leadership, Organizational culture, Strategy execution.

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 Brookfield Properties: Crisis Leadership Following September 11th, 2001 Case Study

Brookfield Properties is a publicly held, North American commercial real estate company focused on the ownership, management, and development of premier office properties located in the downtown core of selected North American markets. Most of Brookfield's assets are in the United States, with headquarters in New York and an executive office in Toronto. Four of the properties that Brookfield owns are adjacent to the World Trade Center site and on September 11, 2001, the terrorist attacks had an immediate impact on Brookfield employees, tenants, and physical property. With little reliable information and in the face of chaos and human tragedy, the president and CEO must develop an action plan that will ensure the safety of all employees and tenants, deal with grief and suffering, assess the damage, enable the company to return to business as usual, and reassure investors and the media of the company's commitment to restore Brookfield's position of market strength.

Case Authors : Kathleen E. Slaughter, Elizabeth O'Neil

Topic : Organizational Development

Related Areas : Crisis management, Leadership, Organizational culture, Strategy execution

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Calculating Net Present Value (NPV) at 6% for Brookfield Properties: Crisis Leadership Following September 11th, 2001 Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10024703)	-10024703	-	-
Year 1	3464408	-6560295	3464408	0.9434	3268309
Year 2	3960327	-2599968	7424735	0.89	3524677
Year 3	3939002	1339034	11363737	0.8396	3307262
Year 4	3244112	4583146	14607849	0.7921	2569641
TOTAL			14607849		12669889

The Net Present Value at 6% discount rate is 2645186

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. Internal Rate of Return
3. Net Present Value
4. Profitability Index

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. Brookfield Properties 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 Brookfield Properties 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 Brookfield Properties: Crisis Leadership Following September 11th, 2001

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 Brookfield Properties 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 Brookfield Properties 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	(10024703)	-10024703	-	-
Year 1	3464408	-6560295	3464408	0.8696	3012529
Year 2	3960327	-2599968	7424735	0.7561	2994576
Year 3	3939002	1339034	11363737	0.6575	2589958
Year 4	3244112	4583146	14607849	0.5718	1854832
TOTAL					10451894

The Net NPV after 4 years is 427191

(10451894 - 10024703 )

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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	(10024703)	-10024703	-	-
Year 1	3464408	-6560295	3464408	0.8333	2887007
Year 2	3960327	-2599968	7424735	0.6944	2750227
Year 3	3939002	1339034	11363737	0.5787	2279515
Year 4	3244112	4583146	14607849	0.4823	1564483
TOTAL					9481232

The Net NPV after 4 years is -543471

At 20% discount rate the NPV is negative (9481232 - 10024703 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Brookfield Properties 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 Brookfield Properties has a NPV value higher than Zero then finance managers at Brookfield Properties 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 Brookfield Properties, then the stock price of the Brookfield Properties 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 Brookfield Properties 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 can impact the cash flow of the project.

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

Understanding of risks involved in 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 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.

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Negotiation Strategy of Brookfield Properties: Crisis Leadership Following September 11th, 2001

References & Further Readings

Kathleen E. Slaughter, Elizabeth O'Neil (2018), "Brookfield Properties: Crisis Leadership Following September 11th, 2001 Harvard Business Review Case Study. Published by HBR Publications.