Growing Integrated Services at Jones Lang LaSalle (2008) (C) 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 Growing Integrated Services at Jones Lang LaSalle (2008) (C) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Growing Integrated Services at Jones Lang LaSalle (2008) (C) case study is a Harvard Business School (HBR) case study written by Ranjay Gulati, Luciana Silvestri. The Growing Integrated Services at Jones Lang LaSalle (2008) (C) (referred as “Jll Jll's” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Marketing, Mergers & acquisitions, Organizational structure, Strategy execution.

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 Growing Integrated Services at Jones Lang LaSalle (2008) (C) Case Study

This case describes the strategic and organizational challenges that Jones Lang LaSalle (JLL) faced between 2005 and 2008. Having dismantled its long-standing service-line-oriented structure, JLL created two interdependent groups: Accounts and Markets. Accounts housed account managers who served JLL's corporate clients. Markets housed brokers specialized in a certain geography. JLL helped drive integration between Accounts and Markets by emphasizing work at the "intersections" between both groups, i.e., instances that required combining both groups' resources. By 2008, however, JLL was facing challenges associated with harnessing the potential of this new structure. There was more growth that could be obtained from penetrating local markets, and top management wondered how to best strengthen their brokerage team. The acquisition of Spaulding and Slye, a renowned Boston-based firm, provided instant growth in some key markets, but organic growth was harder to achieve. While the industry paid brokers with a commission model, JLL did so with a salary and bonus model that aligned well with JLL's culture but proved unattractive to new recruits. America's CEO Peter Roberts outlines the alternatives JLL analyzed as they considered how to strengthen the organization while maintaining its values and integrity. This case is the third in a case series that also comprises cases A, B, and D, and collectively covers JLL's evolution between the years 1999 and 2012.

Case Authors : Ranjay Gulati, Luciana Silvestri

Topic : Strategy & Execution

Related Areas : Marketing, Mergers & acquisitions, Organizational structure, Strategy execution

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Calculating Net Present Value (NPV) at 6% for Growing Integrated Services at Jones Lang LaSalle (2008) (C) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009005)	-10009005	-	-
Year 1	3454880	-6554125	3454880	0.9434	3259321
Year 2	3964447	-2589678	7419327	0.89	3528344
Year 3	3938794	1349116	11358121	0.8396	3307087
Year 4	3225741	4574857	14583862	0.7921	2555089
TOTAL			14583862		12649841

The Net Present Value at 6% discount rate is 2640836

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

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Formula and Steps to Calculate Net Present Value (NPV) of Growing Integrated Services at Jones Lang LaSalle (2008) (C)

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 Jll Jll's 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 Jll Jll's 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	(10009005)	-10009005	-	-
Year 1	3454880	-6554125	3454880	0.8696	3004243
Year 2	3964447	-2589678	7419327	0.7561	2997691
Year 3	3938794	1349116	11358121	0.6575	2589821
Year 4	3225741	4574857	14583862	0.5718	1844328
TOTAL					10436084

The Net NPV after 4 years is 427079

(10436084 - 10009005 )

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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	(10009005)	-10009005	-	-
Year 1	3454880	-6554125	3454880	0.8333	2879067
Year 2	3964447	-2589678	7419327	0.6944	2753088
Year 3	3938794	1349116	11358121	0.5787	2279395
Year 4	3225741	4574857	14583862	0.4823	1555624
TOTAL					9467173

The Net NPV after 4 years is -541832

At 20% discount rate the NPV is negative (9467173 - 10009005 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Jll Jll's 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 Jll Jll's has a NPV value higher than Zero then finance managers at Jll Jll's 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 Jll Jll's, then the stock price of the Jll Jll's 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 Jll Jll's 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 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.

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

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 Growing Integrated Services at Jones Lang LaSalle (2008) (C)

References & Further Readings

Ranjay Gulati, Luciana Silvestri (2018), "Growing Integrated Services at Jones Lang LaSalle (2008) (C) Harvard Business Review Case Study. Published by HBR Publications.