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Protecting the WTO Ministerial Conference of 1999, Epilogue 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, Epilogue 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, Epilogue case study is a Harvard Business School (HBR) case study written by Arnold Howitt, Herman B. Leonard, David Tannenwald. The Protecting the WTO Ministerial Conference of 1999, Epilogue (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, Operations management, 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, Epilogue 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 1897.1


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

Topic : Strategy & Execution

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




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


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10027302) -10027302 - -
Year 1 3452628 -6574674 3452628 0.9434 3257196
Year 2 3971226 -2603448 7423854 0.89 3534377
Year 3 3955179 1351731 11379033 0.8396 3320845
Year 4 3243784 4595515 14622817 0.7921 2569381
TOTAL 14622817 12681799


The Net Present Value at 6% discount rate is 2654497

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. Payback Period
2. Profitability Index
3. Net Present Value
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 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, Epilogue

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 (10027302) -10027302 - -
Year 1 3452628 -6574674 3452628 0.8696 3002285
Year 2 3971226 -2603448 7423854 0.7561 3002817
Year 3 3955179 1351731 11379033 0.6575 2600594
Year 4 3243784 4595515 14622817 0.5718 1854644
TOTAL 10460341


The Net NPV after 4 years is 433039

(10460341 - 10027302 )






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 (10027302) -10027302 - -
Year 1 3452628 -6574674 3452628 0.8333 2877190
Year 2 3971226 -2603448 7423854 0.6944 2757796
Year 3 3955179 1351731 11379033 0.5787 2288877
Year 4 3243784 4595515 14622817 0.4823 1564325
TOTAL 9488187


The Net NPV after 4 years is -539115

At 20% discount rate the NPV is negative (9488187 - 10027302 ) 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 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.

What will be a multi year spillover effect of various taxation regulations.

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.




References & Further Readings

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