A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel 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 A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel case study is a Harvard Business School (HBR) case study written by Roger Porter, Pamela Varley. The A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel (referred as “Massport Coy” 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, Government, Leadership, Security & privacy, Strategic planning.

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 A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel Case Study

This case sequel is a shorter, more focused, "decision-forcing" version of The Turnaround Artist: Craig Coy Tackles Political Influence at Massport (Case Program, 1896.0). Like its more comprehensive counterpart, it addresses a set of decisions facing Craig Coy, a business executive, retired Coast Guard officer, and former White House security adviser, when he was named executive director of the Massachusetts Port Authority, or "Massport," on April 11, 2002. The appointment came at a time of significant turmoil at Massport, the state authority responsible for managing Boston's Logan International Airport and several other regional transportation resources. The two airline jets hijacked in the attack on the World Trade Center in New York City on September 11, 2001 had departed from Logan. Massport had not been responsible for the security practices that had allowed the terrorists to board the jetliners with weapons, but the authority had, in recent years, repeatedly come under fire for political excesses and patronage. These long-tolerated vagaries-when vaulted into the national spotlight-suddenly appeared tawdry and intolerable to state officials and lawmakers. Coy's mandate, when hired a few months later, was to stop to the excesses of the past, to improve safety and security, to run the Authority in businesslike fashion-in sum, to effect a "cultural turnaround." This case describes a string of choices Coy had to make early in his tenure that pertained to the people-management side of his challenge. For example, Coy had to decide the extent to which he wanted to fire top managers at the authority and bring in his own team. He had to find a way to signal the shift to new priorities. And he had to decide what to do when elected officials-whose support was crucial to Massport in a number of respects-called up and asked the authority to hire their constituents. HKS Case Number 1901.1

Case Authors : Roger Porter, Pamela Varley

Topic : Strategy & Execution

Related Areas : Decision making, Government, Leadership, Security & privacy, Strategic planning

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Calculating Net Present Value (NPV) at 6% for A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10010743)	-10010743	-	-
Year 1	3469013	-6541730	3469013	0.9434	3272654
Year 2	3964558	-2577172	7433571	0.89	3528443
Year 3	3959096	1381924	11392667	0.8396	3324133
Year 4	3250825	4632749	14643492	0.7921	2574958
TOTAL			14643492		12700188

The Net Present Value at 6% discount rate is 2689445

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. Profitability Index
2. Internal Rate of Return
3. Net Present Value
4. Payback Period

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 Massport Coy 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. Massport Coy 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 A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel

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 Massport Coy 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 Massport Coy 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	(10010743)	-10010743	-	-
Year 1	3469013	-6541730	3469013	0.8696	3016533
Year 2	3964558	-2577172	7433571	0.7561	2997775
Year 3	3959096	1381924	11392667	0.6575	2603170
Year 4	3250825	4632749	14643492	0.5718	1858670
TOTAL					10476148

The Net NPV after 4 years is 465405

(10476148 - 10010743 )

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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	(10010743)	-10010743	-	-
Year 1	3469013	-6541730	3469013	0.8333	2890844
Year 2	3964558	-2577172	7433571	0.6944	2753165
Year 3	3959096	1381924	11392667	0.5787	2291144
Year 4	3250825	4632749	14643492	0.4823	1567720
TOTAL					9502873

The Net NPV after 4 years is -507870

At 20% discount rate the NPV is negative (9502873 - 10010743 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Massport Coy 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 Massport Coy has a NPV value higher than Zero then finance managers at Massport Coy 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 Massport Coy, then the stock price of the Massport Coy 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 Massport Coy 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.

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 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.

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Negotiation Strategy of A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel

References & Further Readings

Roger Porter, Pamela Varley (2018), "A Tricky Mandate: Craig Coy and the Problem of Patronage Hiring at Massport, Sequel Harvard Business Review Case Study. Published by HBR Publications.