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Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion 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 Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion case study is a Harvard Business School (HBR) case study written by Norm O'Reilly, George Foster. The Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion (referred as “Participaction Partnerships” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Health, International business, Joint ventures, Marketing, Social enterprise.

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 Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion Case Study


In 2009, ParticipACTION was a Toronto-based not-for-profit organization that had a storied history of inspiring and supporting active and healthy living for Canadians. Led by CEO Kelly Murumets, ParticipACTION was to lead a steering committee of representatives of the not-for-profit sector and the private sector, as well as academics, towards developing a set of 'how-to' guidelines for not-for-profit sport and physical activity organizations on forming effective partnerships with the private sector. Due to decreasing government support, the need to secure alternate resources and funding, and the proliferation of competition, sports and health organizations were extremely interested in such partnerships. Recent successes made ParticipACTION realize that it and other sports advocate organizations around the globe, needed to become more strategic and innovative in engaging private companies. Coming off of a successful internal restructuring and partnership with Coca Cola, ParticipACTION received an opportunity to be involved with the upcoming 3rd International Congress on Physical Activity and Public Health Conference (ICPAPH ). ICPAPH would attract over 1000 leaders from dozens of countries and would be an ideal forum for sharing guidelines for responsible partnerships. This case surveys sports and healthy living advocacy and explores how ParticipACTION went about leading the process to develop guidelines for private sector partnerships.


Case Authors : Norm O'Reilly, George Foster

Topic : Organizational Development

Related Areas : Health, International business, Joint ventures, Marketing, Social enterprise




Calculating Net Present Value (NPV) at 6% for Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10019110) -10019110 - -
Year 1 3460953 -6558157 3460953 0.9434 3265050
Year 2 3965968 -2592189 7426921 0.89 3529697
Year 3 3961201 1369012 11388122 0.8396 3325901
Year 4 3224388 4593400 14612510 0.7921 2554017
TOTAL 14612510 12674665




The Net Present Value at 6% discount rate is 2655555

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

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 Participaction Partnerships 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. Participaction Partnerships 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 Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion

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 Participaction Partnerships 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 Participaction Partnerships 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 (10019110) -10019110 - -
Year 1 3460953 -6558157 3460953 0.8696 3009524
Year 2 3965968 -2592189 7426921 0.7561 2998842
Year 3 3961201 1369012 11388122 0.6575 2604554
Year 4 3224388 4593400 14612510 0.5718 1843554
TOTAL 10456474


The Net NPV after 4 years is 437364

(10456474 - 10019110 )








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 (10019110) -10019110 - -
Year 1 3460953 -6558157 3460953 0.8333 2884128
Year 2 3965968 -2592189 7426921 0.6944 2754144
Year 3 3961201 1369012 11388122 0.5787 2292362
Year 4 3224388 4593400 14612510 0.4823 1554971
TOTAL 9485605


The Net NPV after 4 years is -533505

At 20% discount rate the NPV is negative (9485605 - 10019110 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Participaction Partnerships 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 Participaction Partnerships has a NPV value higher than Zero then finance managers at Participaction Partnerships 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 Participaction Partnerships, then the stock price of the Participaction Partnerships 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 Participaction Partnerships 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 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.

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

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 Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion

References & Further Readings

Norm O'Reilly, George Foster (2018), "Not for Profit / Private Sector Partnerships in Sport and Physical Activity: ParticipACTION as Champion Harvard Business Review Case Study. Published by HBR Publications.


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