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Protecting the WTO Ministerial Conference of 1999 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 Protecting the WTO Ministerial Conference of 1999 case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Protecting the WTO Ministerial Conference of 1999 case study is a Harvard Business School (HBR) case study written by Herman B. Leonard, David Tannenwald, Arnold Howitt. The Protecting the WTO Ministerial Conference of 1999 (referred as “Ministerial Protesters” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Decision making, Leadership, Risk management, Security & privacy.

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 Protecting the WTO Ministerial Conference of 1999 Case Study


On one side, a loose network of protesters made arrangements for dramatizing their opposition to the WTO and international trade practices. At the same time, public safety officials from local, state, and federal agencies developed security plans for the public areas near the locus of the ministerial meetings. Their aim was to ensure that the talks proceeded smoothly while preserving the activists' rights to peaceful protest. Throughout the planning process, local leaders operated on the assumption that the tolerant ethos of the Pacific Northwest would prevail. This assumption proved terribly wrong, however, when, on the opening day of the talks, law enforcement officials lost control of the crowds gathered outside the meeting venue. Readers are asked to consider what lessons can be drawn from this ultimately inadequate security planning process. How might security planners have thought differently about how to prepare for the conference? What should they have anticipated in advance? How could they have developed a better awareness of protesters' activities and plans? HKS Case Number 1897.0


Case Authors : Herman B. Leonard, David Tannenwald, Arnold Howitt

Topic : Strategy & Execution

Related Areas : Decision making, Leadership, Risk management, Security & privacy




Calculating Net Present Value (NPV) at 6% for Protecting the WTO Ministerial Conference of 1999 Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10006366) -10006366 - -
Year 1 3468188 -6538178 3468188 0.9434 3271875
Year 2 3980252 -2557926 7448440 0.89 3542410
Year 3 3939658 1381732 11388098 0.8396 3307813
Year 4 3238570 4620302 14626668 0.7921 2565251
TOTAL 14626668 12687349




The Net Present Value at 6% discount rate is 2680983

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. Payback Period
3. Internal Rate of Return
4. Profitability Index

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 Ministerial Protesters 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. Ministerial Protesters 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 Protecting the WTO Ministerial Conference of 1999

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 Strategy & Execution 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 Ministerial Protesters 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 Ministerial Protesters 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 (10006366) -10006366 - -
Year 1 3468188 -6538178 3468188 0.8696 3015816
Year 2 3980252 -2557926 7448440 0.7561 3009642
Year 3 3939658 1381732 11388098 0.6575 2590389
Year 4 3238570 4620302 14626668 0.5718 1851663
TOTAL 10467510


The Net NPV after 4 years is 461144

(10467510 - 10006366 )








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 (10006366) -10006366 - -
Year 1 3468188 -6538178 3468188 0.8333 2890157
Year 2 3980252 -2557926 7448440 0.6944 2764064
Year 3 3939658 1381732 11388098 0.5787 2279895
Year 4 3238570 4620302 14626668 0.4823 1561810
TOTAL 9495926


The Net NPV after 4 years is -510440

At 20% discount rate the NPV is negative (9495926 - 10006366 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ministerial Protesters 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 Ministerial Protesters has a NPV value higher than Zero then finance managers at Ministerial Protesters 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 Ministerial Protesters, then the stock price of the Ministerial Protesters 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 Ministerial Protesters 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 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.

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 can impact the cash flow of 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 Protecting the WTO Ministerial Conference of 1999

References & Further Readings

Herman B. Leonard, David Tannenwald, Arnold Howitt (2018), "Protecting the WTO Ministerial Conference of 1999 Harvard Business Review Case Study. Published by HBR Publications.


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