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Lake Eola Charter School: Securing the Brand Through Environmental Analysis 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 Lake Eola Charter School: Securing the Brand Through Environmental Analysis case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Lake Eola Charter School: Securing the Brand Through Environmental Analysis case study is a Harvard Business School (HBR) case study written by Mary Conway Dato-on, Eileen Weisenbach Keller. The Lake Eola Charter School: Securing the Brand Through Environmental Analysis (referred as “Eola Nonprofit” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. 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 Lake Eola Charter School: Securing the Brand Through Environmental Analysis Case Study


In late 2009, the principal of the Lake Eola Charter School (LECS) in downtown Orlando, Florida completed a course on nonprofit branding at the Philanthropy & Nonprofit Leadership Center at a local college. She was energized and ready to apply the information she had learned to evaluate the school's competitive position and to determine its level of mission fulfillment and progress toward goals. Well-suited for running a school, with a doctorate in education administration, the principal had taken the class to shore up her understanding of planning for and managing a nonprofit organization (NPO). In her mind, the key lesson was the need for an environmental analysis to better understand the school's internal environment and external competitors in order to improve the position of the school vis-a-vis the community's educational needs. She employed an MBA intern to help her develop tools for an internal and external environmental scan. The intern had just wrapped up the data collection and analysis. The principal was ready to use the summer "down time" to make changes for the 2010 academic year, if only she knew how to proceed. This case is suitable for marketing strategy courses. The detailed treatment of environmental analysis could also make the case useful in business policy and strategy courses. Instructors will find the case particularly well-suited for classes on marketing, strategy and management in the area of public administration and nonprofit organizations.


Case Authors : Mary Conway Dato-on, Eileen Weisenbach Keller

Topic : Sales & Marketing

Related Areas : Marketing




Calculating Net Present Value (NPV) at 6% for Lake Eola Charter School: Securing the Brand Through Environmental Analysis Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10011025) -10011025 - -
Year 1 3469381 -6541644 3469381 0.9434 3273001
Year 2 3967252 -2574392 7436633 0.89 3530840
Year 3 3956442 1382050 11393075 0.8396 3321905
Year 4 3249769 4631819 14642844 0.7921 2574121
TOTAL 14642844 12699868




The Net Present Value at 6% discount rate is 2688843

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

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 Eola Nonprofit 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. Eola Nonprofit 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 Lake Eola Charter School: Securing the Brand Through Environmental Analysis

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 Eola Nonprofit 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 Eola Nonprofit 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 (10011025) -10011025 - -
Year 1 3469381 -6541644 3469381 0.8696 3016853
Year 2 3967252 -2574392 7436633 0.7561 2999812
Year 3 3956442 1382050 11393075 0.6575 2601425
Year 4 3249769 4631819 14642844 0.5718 1858066
TOTAL 10476156


The Net NPV after 4 years is 465131

(10476156 - 10011025 )








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 (10011025) -10011025 - -
Year 1 3469381 -6541644 3469381 0.8333 2891151
Year 2 3967252 -2574392 7436633 0.6944 2755036
Year 3 3956442 1382050 11393075 0.5787 2289608
Year 4 3249769 4631819 14642844 0.4823 1567211
TOTAL 9503006


The Net NPV after 4 years is -508019

At 20% discount rate the NPV is negative (9503006 - 10011025 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Eola Nonprofit 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 Eola Nonprofit has a NPV value higher than Zero then finance managers at Eola Nonprofit 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 Eola Nonprofit, then the stock price of the Eola Nonprofit 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 Eola Nonprofit 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 –

Understanding of risks involved in the project.

What can impact the cash flow of the project.

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 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.

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 Lake Eola Charter School: Securing the Brand Through Environmental Analysis

References & Further Readings

Mary Conway Dato-on, Eileen Weisenbach Keller (2018), "Lake Eola Charter School: Securing the Brand Through Environmental Analysis Harvard Business Review Case Study. Published by HBR Publications.


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