Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario 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 Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario case study is a Harvard Business School (HBR) case study written by Gwyneth Edwards. The Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario (referred as “Chapleau Nortel” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Ethics, IT, Social responsibility.

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 Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario Case Study

Bell, Nortel and Chapleau, Ontario, set out to transform the community of Chapleau through the deployment of technology and business solutions. Together they deploy a wireless broadband network in town, providing mobile internet access to the 2800 residents and town visitors. They also worked with the town's five schools, hospital and local businesses to identify and deploy business solutions. The hospital is given an indoor wireless network, an upgraded telephone system and additional computers. The schools are given laptops, wireless access, multimedia equipment, and teacher training. The community itself, in addition to the free wireless broadband service, is provided with a community portal, computer training and free access to a myriad of technologies. The local community centre is set up with multimedia equipment. University researchers are brought in to study the impact of the technology on the community, small businesses, health and education. A diabetes healthcare trial is launched. Employment is provided to 5 local residents. Over the course of two years, millions of dollars are spent and much is learned, by not only Bell and Nortel but also the community itself, government (federal, provincial, municipal) and others. Bell and Nortel create lasting relationships with community members. A degree of interdependence is established. Almost two years later, the project is nearing its end. The Chapleau Town Council voices their concern about what will remain in the community. They request sustainability solutions for the investments made by the project team. The steering committee must determine the needs and saliency of the project stakeholders and propose a sustainable solution.

Case Authors : Gwyneth Edwards

Topic : Strategy & Execution

Related Areas : Ethics, IT, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10007979)	-10007979	-	-
Year 1	3443223	-6564756	3443223	0.9434	3248324
Year 2	3956925	-2607831	7400148	0.89	3521649
Year 3	3957981	1350150	11358129	0.8396	3323197
Year 4	3241471	4591621	14599600	0.7921	2567549
TOTAL			14599600		12660719

The Net Present Value at 6% discount rate is 2652740

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. Internal Rate of Return
2. Payback Period
3. Net Present Value
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 Chapleau Nortel 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. Chapleau Nortel 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 Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario

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 Chapleau Nortel 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 Chapleau Nortel 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	(10007979)	-10007979	-	-
Year 1	3443223	-6564756	3443223	0.8696	2994107
Year 2	3956925	-2607831	7400148	0.7561	2992004
Year 3	3957981	1350150	11358129	0.6575	2602437
Year 4	3241471	4591621	14599600	0.5718	1853322
TOTAL					10441869

The Net NPV after 4 years is 433890

(10441869 - 10007979 )

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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	(10007979)	-10007979	-	-
Year 1	3443223	-6564756	3443223	0.8333	2869353
Year 2	3956925	-2607831	7400148	0.6944	2747865
Year 3	3957981	1350150	11358129	0.5787	2290498
Year 4	3241471	4591621	14599600	0.4823	1563209
TOTAL					9470925

The Net NPV after 4 years is -537054

At 20% discount rate the NPV is negative (9470925 - 10007979 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Chapleau Nortel 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 Chapleau Nortel has a NPV value higher than Zero then finance managers at Chapleau Nortel 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 Chapleau Nortel, then the stock price of the Chapleau Nortel 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 Chapleau Nortel 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 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 will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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.

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Negotiation Strategy of Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario

References & Further Readings

Gwyneth Edwards (2018), "Bridging the Digital Divide: The Case of Bell, Nortel and Chapleau, Ontario Harvard Business Review Case Study. Published by HBR Publications.