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Goldman Sachs: The 10,000 Women Initiative, Chinese Version 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 Goldman Sachs: The 10,000 Women Initiative, Chinese Version case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Goldman Sachs: The 10,000 Women Initiative, Chinese Version case study is a Harvard Business School (HBR) case study written by Christopher Marquis, V. Kasturi Rangan, Catherine Ross. The Goldman Sachs: The 10,000 Women Initiative, Chinese Version (referred as “Women Initiative” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Emerging markets, Entrepreneurship, Globalization, Joint ventures, Leadership, Marketing, Social responsibility.

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 Goldman Sachs: The 10,000 Women Initiative, Chinese Version Case Study


Goldman Sachs' five-year, $100 million philanthropic initiative to provide practical business and management education to 10,000 women around the globe recently celebrated its first anniversary and over 1,200 women were either enrolled in, or graduated from sponsored certificate programs. The case describes the conception, development and implementation of the initiative and outlines some key strategic decisions facing the firm as they roll-out the program over the coming years. These include: how to organize the network of schools that deliver the educational services, how to determine the best outside partners to provide additional services for the women entrepreneurs, how to best assess the impact of the program, and finally the extent to which the initiative provides contributions to the long-term strategy of the firm.


Case Authors : Christopher Marquis, V. Kasturi Rangan, Catherine Ross

Topic : Sales & Marketing

Related Areas : Emerging markets, Entrepreneurship, Globalization, Joint ventures, Leadership, Marketing, Social responsibility




Calculating Net Present Value (NPV) at 6% for Goldman Sachs: The 10,000 Women Initiative, Chinese Version Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10004569) -10004569 - -
Year 1 3457464 -6547105 3457464 0.9434 3261758
Year 2 3976807 -2570298 7434271 0.89 3539344
Year 3 3971037 1400739 11405308 0.8396 3334159
Year 4 3229625 4630364 14634933 0.7921 2558165
TOTAL 14634933 12693427


The Net Present Value at 6% discount rate is 2688858

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. Internal Rate of Return
2. Profitability Index
3. Net Present Value
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Women Initiative 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 Women Initiative have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of Goldman Sachs: The 10,000 Women Initiative, Chinese Version

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 Sales & Marketing 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 Women Initiative 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 Women Initiative 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 (10004569) -10004569 - -
Year 1 3457464 -6547105 3457464 0.8696 3006490
Year 2 3976807 -2570298 7434271 0.7561 3007037
Year 3 3971037 1400739 11405308 0.6575 2611021
Year 4 3229625 4630364 14634933 0.5718 1846549
TOTAL 10471098


The Net NPV after 4 years is 466529

(10471098 - 10004569 )






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 (10004569) -10004569 - -
Year 1 3457464 -6547105 3457464 0.8333 2881220
Year 2 3976807 -2570298 7434271 0.6944 2761672
Year 3 3971037 1400739 11405308 0.5787 2298054
Year 4 3229625 4630364 14634933 0.4823 1557497
TOTAL 9498442


The Net NPV after 4 years is -506127

At 20% discount rate the NPV is negative (9498442 - 10004569 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Women Initiative 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 Women Initiative has a NPV value higher than Zero then finance managers at Women Initiative 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 Women Initiative, then the stock price of the Women Initiative 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 Women Initiative 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.




References & Further Readings

Christopher Marquis, V. Kasturi Rangan, Catherine Ross (2018), "Goldman Sachs: The 10,000 Women Initiative, Chinese Version Harvard Business Review Case Study. Published by HBR Publications.