What are Business Schools Doing for Business Today? 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 What are Business Schools Doing for Business Today? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. What are Business Schools Doing for Business Today? case study is a Harvard Business School (HBR) case study written by Fred R. David, Meredith E. David, Forest R. David. The What are Business Schools Doing for Business Today? (referred as “Graduation Disparity” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Managing people, 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

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Case Description of What are Business Schools Doing for Business Today? Case Study

This article examines disparity between business school focus and business community needs. A content analysis of 200 corporate job descriptions collected in Fall 2009 revealed 140 specific license/certification/skills commonly cited as required for candidates applying for business jobs. A detailed matching of these post-graduation proficiencies with pre-graduation business major tracks is provided herein to assist schools in better aligning curricula with job requirements. This matching and aligning process is proposed as a key means for reducing disparity between post-graduation licenses/certification/skills required and the academic tracks that are feeders for such positions. Examination of 200 rA?sumA?s of business students nearing graduation revealed low to no proficiency on the job description-derived skill sets. This finding suggests that disparity between school of business focus and practitioner needs is ongoing and potentially problematic, at least at the institutions sampled. A content analysis of 100 school of business course syllabi and 20 textbooks supported this conclusion. This article provides suggestions for closing the gap between business school curricula and corporate needs. The old business school is compared to our vision of the new business school, where close alignment of pre-graduation training with post-graduation job requirements serves both students and practitioners well.

Case Authors : Fred R. David, Meredith E. David, Forest R. David

Topic : Organizational Development

Related Areas : Managing people, Social enterprise

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Calculating Net Present Value (NPV) at 6% for What are Business Schools Doing for Business Today? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10011253)	-10011253	-	-
Year 1	3445134	-6566119	3445134	0.9434	3250126
Year 2	3962091	-2604028	7407225	0.89	3526247
Year 3	3959990	1355962	11367215	0.8396	3324884
Year 4	3250696	4606658	14617911	0.7921	2574856
TOTAL			14617911		12676113

The Net Present Value at 6% discount rate is 2664860

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. Internal Rate of Return
2. Payback Period
3. Profitability Index
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Graduation Disparity 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 Graduation Disparity 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 What are Business Schools Doing for Business Today?

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 Graduation Disparity 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 Graduation Disparity 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	(10011253)	-10011253	-	-
Year 1	3445134	-6566119	3445134	0.8696	2995769
Year 2	3962091	-2604028	7407225	0.7561	2995910
Year 3	3959990	1355962	11367215	0.6575	2603758
Year 4	3250696	4606658	14617911	0.5718	1858596
TOTAL					10454032

The Net NPV after 4 years is 442779

(10454032 - 10011253 )

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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	(10011253)	-10011253	-	-
Year 1	3445134	-6566119	3445134	0.8333	2870945
Year 2	3962091	-2604028	7407225	0.6944	2751452
Year 3	3959990	1355962	11367215	0.5787	2291661
Year 4	3250696	4606658	14617911	0.4823	1567658
TOTAL					9481716

The Net NPV after 4 years is -529537

At 20% discount rate the NPV is negative (9481716 - 10011253 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Graduation Disparity 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 Graduation Disparity has a NPV value higher than Zero then finance managers at Graduation Disparity 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 Graduation Disparity, then the stock price of the Graduation Disparity 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 Graduation Disparity 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 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 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.

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Negotiation Strategy of What are Business Schools Doing for Business Today?

References & Further Readings

Fred R. David, Meredith E. David, Forest R. David (2018), "What are Business Schools Doing for Business Today? Harvard Business Review Case Study. Published by HBR Publications.