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The Wonderful World of Human Resources at Disney 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 Wonderful World of Human Resources at Disney case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Wonderful World of Human Resources at Disney case study is a Harvard Business School (HBR) case study written by Gerry Yemen, Lynn A. Isabella. The The Wonderful World of Human Resources at Disney (referred as “Disney Guest” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Leadership, Motivating people, Organizational culture.

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 The Wonderful World of Human Resources at Disney Case Study


What kind of culture does Walt Disney Company (WDC) want to create? This case uses the experiences of a young visitor to one of WDC's resort hotels to set the stage for an analysis of selecting, hiring, training, and retaining and how those practices are governed by the culture of a large American company. The situation provides an opportunity to explore human resource policies, organizational design as well as how all those elements reinforce the culture. The case opens with an interaction between a young Animal Kingdom Lodge guest and an employee (or cast member as the company refers to employees). There were many different ways the exchange could have unfolded yet the experience was magical for the youngster. What made this exchange a memorable experience for this young guest? Would Walt Disney have been surprised?


Case Authors : Gerry Yemen, Lynn A. Isabella

Topic : Organizational Development

Related Areas : Leadership, Motivating people, Organizational culture




Calculating Net Present Value (NPV) at 6% for The Wonderful World of Human Resources at Disney Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10003569) -10003569 - -
Year 1 3469159 -6534410 3469159 0.9434 3272792
Year 2 3963018 -2571392 7432177 0.89 3527072
Year 3 3942697 1371305 11374874 0.8396 3310364
Year 4 3250363 4621668 14625237 0.7921 2574592
TOTAL 14625237 12684820




The Net Present Value at 6% discount rate is 2681251

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. Payback Period
2. Profitability Index
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 Disney Guest 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. Disney Guest 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 The Wonderful World of Human Resources at Disney

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 Disney Guest 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 Disney Guest 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 (10003569) -10003569 - -
Year 1 3469159 -6534410 3469159 0.8696 3016660
Year 2 3963018 -2571392 7432177 0.7561 2996611
Year 3 3942697 1371305 11374874 0.6575 2592387
Year 4 3250363 4621668 14625237 0.5718 1858406
TOTAL 10464064


The Net NPV after 4 years is 460495

(10464064 - 10003569 )








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 (10003569) -10003569 - -
Year 1 3469159 -6534410 3469159 0.8333 2890966
Year 2 3963018 -2571392 7432177 0.6944 2752096
Year 3 3942697 1371305 11374874 0.5787 2281653
Year 4 3250363 4621668 14625237 0.4823 1567498
TOTAL 9492213


The Net NPV after 4 years is -511356

At 20% discount rate the NPV is negative (9492213 - 10003569 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Disney Guest 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 Disney Guest has a NPV value higher than Zero then finance managers at Disney Guest 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 Disney Guest, then the stock price of the Disney Guest 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 Disney Guest 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.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 The Wonderful World of Human Resources at Disney

References & Further Readings

Gerry Yemen, Lynn A. Isabella (2018), "The Wonderful World of Human Resources at Disney Harvard Business Review Case Study. Published by HBR Publications.


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