WWF's Living Planet @ Work: Championed by HP 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 WWF's Living Planet @ Work: Championed by HP case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. WWF's Living Planet @ Work: Championed by HP case study is a Harvard Business School (HBR) case study written by Oana Branzei, Haiying Lin, Dwarkaprasad Chakrvarty. The WWF's Living Planet @ Work: Championed by HP (referred as “Planet Championed” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Innovation, Sustainability.

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 WWF's Living Planet @ Work: Championed by HP Case Study

Leading up to the completion of a successful partnership between Hewlett-Packard Canada and World Wildlife Fund Canada, the two individuals who championed the program contemplate their separate and joint next steps: should their organizations renew or exit the partnership? Together, they had designed and delivered a world-first program, Living Planet @ Work, which had enrolled more than 500 companies, large and small, whose employees had already raised more than $1 million in charitable donations through workplace giving. The program was helping corporate Canada harness the collective desire and power of their employees for the good of business and the future of the planet. The two champions had a short window to go global and scale up the positive impact of the program.

Case Authors : Oana Branzei, Haiying Lin, Dwarkaprasad Chakrvarty

Topic : Strategy & Execution

Related Areas : Innovation, Sustainability

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Calculating Net Present Value (NPV) at 6% for WWF's Living Planet @ Work: Championed by HP Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009979)	-10009979	-	-
Year 1	3452018	-6557961	3452018	0.9434	3256621
Year 2	3966549	-2591412	7418567	0.89	3530214
Year 3	3951848	1360436	11370415	0.8396	3318048
Year 4	3244869	4605305	14615284	0.7921	2570240
TOTAL			14615284		12675123

The Net Present Value at 6% discount rate is 2665144

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. Payback Period
2. Net Present Value
3. Profitability Index
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 Planet Championed 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. Planet Championed shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of WWF's Living Planet @ Work: Championed by HP

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 Planet Championed 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 Planet Championed 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	(10009979)	-10009979	-	-
Year 1	3452018	-6557961	3452018	0.8696	3001755
Year 2	3966549	-2591412	7418567	0.7561	2999281
Year 3	3951848	1360436	11370415	0.6575	2598404
Year 4	3244869	4605305	14615284	0.5718	1855264
TOTAL					10454704

The Net NPV after 4 years is 444725

(10454704 - 10009979 )

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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	(10009979)	-10009979	-	-
Year 1	3452018	-6557961	3452018	0.8333	2876682
Year 2	3966549	-2591412	7418567	0.6944	2754548
Year 3	3951848	1360436	11370415	0.5787	2286949
Year 4	3244869	4605305	14615284	0.4823	1564848
TOTAL					9483027

The Net NPV after 4 years is -526952

At 20% discount rate the NPV is negative (9483027 - 10009979 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Planet Championed 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 Planet Championed has a NPV value higher than Zero then finance managers at Planet Championed 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 Planet Championed, then the stock price of the Planet Championed 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 Planet Championed 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.

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Negotiation Strategy of WWF's Living Planet @ Work: Championed by HP

References & Further Readings

Oana Branzei, Haiying Lin, Dwarkaprasad Chakrvarty (2018), "WWF's Living Planet @ Work: Championed by HP Harvard Business Review Case Study. Published by HBR Publications.