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Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface? 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 Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface? case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface? case study is a Harvard Business School (HBR) case study written by Matthew A. Douglas, David Strutton. The Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface? (referred as “Purple Military” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Marketing.

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 Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface? Case Study


When the colors of all the U.S. armed services' uniforms are combined, the color purple appears; therefore, military insiders refer to inter-service operations as "purple" operations. Now a core concept, the "jointness" of U.S. military strategic response to a critical operational failure encapsulates principles and processes through which two or more armed services are best able to integrate strategies, strengths, and capabilities in ways that yield genuine synergies, despite the differences in mission and culture that naturally separate the services. The now ingrained ability of military services to "go purple" quickly has materially contributed to strategic and operational successes during the last 20 years. The internal circumstances as well as global environmental challenges faced by domestic firms, particularly at the marketing-manufacturing (M-M) interface, resonate with those faced by the U.S. military. Firms may benefit from evaluating the prospect of "going purple" at this crucial point of interface. This article integrates military-like jointness principles into an organizational framework that functions as a guide to pursuing cross-functional M-M integration more successfully. The framework also provides a methodology through which managers can determine whether and how much "purple" ought to be pursued. a??a??a??a??a??


Case Authors : Matthew A. Douglas, David Strutton

Topic : Organizational Development

Related Areas : Marketing




Calculating Net Present Value (NPV) at 6% for Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface? Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10016742) -10016742 - -
Year 1 3462668 -6554074 3462668 0.9434 3266668
Year 2 3974481 -2579593 7437149 0.89 3537274
Year 3 3941059 1361466 11378208 0.8396 3308989
Year 4 3249575 4611041 14627783 0.7921 2573968
TOTAL 14627783 12686899




The Net Present Value at 6% discount rate is 2670157

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 Purple Military 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. Purple Military 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 Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface?

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 Purple Military 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 Purple Military 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 (10016742) -10016742 - -
Year 1 3462668 -6554074 3462668 0.8696 3011016
Year 2 3974481 -2579593 7437149 0.7561 3005279
Year 3 3941059 1361466 11378208 0.6575 2591310
Year 4 3249575 4611041 14627783 0.5718 1857955
TOTAL 10465560


The Net NPV after 4 years is 448818

(10465560 - 10016742 )








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 (10016742) -10016742 - -
Year 1 3462668 -6554074 3462668 0.8333 2885557
Year 2 3974481 -2579593 7437149 0.6944 2760056
Year 3 3941059 1361466 11378208 0.5787 2280705
Year 4 3249575 4611041 14627783 0.4823 1567118
TOTAL 9493436


The Net NPV after 4 years is -523306

At 20% discount rate the NPV is negative (9493436 - 10016742 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Purple Military 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 Purple Military has a NPV value higher than Zero then finance managers at Purple Military 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 Purple Military, then the stock price of the Purple Military 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 Purple Military 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 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.

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.






Negotiation Strategy of Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface?

References & Further Readings

Matthew A. Douglas, David Strutton (2018), "Going "Purple": Can Military Jointness Principles Provide a Key to More Successful Integration at the Marketing-Manufacturing Interface? Harvard Business Review Case Study. Published by HBR Publications.


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