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"Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp 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 "Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. "Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp case study is a Harvard Business School (HBR) case study written by Gina Grandy, Rhian Stewart. The "Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp (referred as “Camp Faith” 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.

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 "Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp Case Study


Board members of a youth camp affiliated with the United Church of Canada were contemplating how to improve the competitive positioning of the camp. The organization recently received a relatively large donation and the Board Chair viewed it as an opportunity to revisit the organization's direction and positioning relative to other camps in the area. The organization faced competition from a number of faith based and non-faith based camps, most of which offered more diverse programming or were positioned with a stronger Christian message. The Board needed to determine how to improve the organization's competitive position without jeopardizing its Christian roots and core mission. It also had to decide how the donated money could support this, whether through a new building or other means.


Case Authors : Gina Grandy, Rhian Stewart

Topic : Strategy & Execution

Related Areas : Marketing




Calculating Net Present Value (NPV) at 6% for "Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10021562) -10021562 - -
Year 1 3445697 -6575865 3445697 0.9434 3250658
Year 2 3967059 -2608806 7412756 0.89 3530668
Year 3 3949296 1340490 11362052 0.8396 3315905
Year 4 3249881 4590371 14611933 0.7921 2574210
TOTAL 14611933 12671441




The Net Present Value at 6% discount rate is 2649879

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Camp Faith 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 Camp Faith have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of "Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp

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 Camp Faith 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 Camp Faith 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 (10021562) -10021562 - -
Year 1 3445697 -6575865 3445697 0.8696 2996258
Year 2 3967059 -2608806 7412756 0.7561 2999667
Year 3 3949296 1340490 11362052 0.6575 2596726
Year 4 3249881 4590371 14611933 0.5718 1858130
TOTAL 10450781


The Net NPV after 4 years is 429219

(10450781 - 10021562 )








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 (10021562) -10021562 - -
Year 1 3445697 -6575865 3445697 0.8333 2871414
Year 2 3967059 -2608806 7412756 0.6944 2754902
Year 3 3949296 1340490 11362052 0.5787 2285472
Year 4 3249881 4590371 14611933 0.4823 1567265
TOTAL 9479054


The Net NPV after 4 years is -542508

At 20% discount rate the NPV is negative (9479054 - 10021562 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Camp Faith 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 Camp Faith has a NPV value higher than Zero then finance managers at Camp Faith 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 Camp Faith, then the stock price of the Camp Faith 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 Camp Faith 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 will be a multi year spillover effect of various taxation regulations.

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.

What can impact the cash flow of the project.

Understanding of risks involved in 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 "Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp

References & Further Readings

Gina Grandy, Rhian Stewart (2018), ""Keeping the Faith"? Competitive Positioning of a Not-for-Profit Youth Camp Harvard Business Review Case Study. Published by HBR Publications.


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