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How to Make the Matrix Work: Answering to Multiple Bosses 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 How to Make the Matrix Work: Answering to Multiple Bosses case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. How to Make the Matrix Work: Answering to Multiple Bosses case study is a Harvard Business School (HBR) case study written by Nick Shreiber, Mike Rosenberg. The How to Make the Matrix Work: Answering to Multiple Bosses (referred as “Matrix Bosses” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, .

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 How to Make the Matrix Work: Answering to Multiple Bosses Case Study


Managing a multibusiness enterprise on a global scale brings a level of complexity that is virtually impossible to handle with a simple straight-line, top-down hierarchy. A matrix offers a solution -- yet it is tricky to manage. In a matrix organization, senior managers have overlapping responsibilities, frequently answering to two bosses: one with a remit for a certain region, another for a business group or product family, with solid-line and dotted-line reporting relationships to each. Based on the authors' experiences of matrix organizations, they identify five keys to successful matrix management: a strong and positive corporate culture; the right people in the right places; clear roles and responsibilities in decision processes; shared performance measures and rewards; and extraordinary communications. This article analyzes each of these keys, stressing how all five must work in concert if they are to enable the smooth functioning of a matrix organization. As the globalization of markets continues apace, the need for matrix management will only intensify, demanding that leaders adopt the right mind-set and commit the time and effort required to make the matrix work.


Case Authors : Nick Shreiber, Mike Rosenberg

Topic : Strategy & Execution

Related Areas :




Calculating Net Present Value (NPV) at 6% for How to Make the Matrix Work: Answering to Multiple Bosses Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10008726) -10008726 - -
Year 1 3446342 -6562384 3446342 0.9434 3251266
Year 2 3973730 -2588654 7420072 0.89 3536606
Year 3 3957873 1369219 11377945 0.8396 3323106
Year 4 3225096 4594315 14603041 0.7921 2554578
TOTAL 14603041 12665556


The Net Present Value at 6% discount rate is 2656830

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. Profitability Index
2. Net Present Value
3. Payback Period
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. Matrix Bosses 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 Matrix Bosses 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 How to Make the Matrix Work: Answering to Multiple Bosses

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 Matrix Bosses 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 Matrix Bosses 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 (10008726) -10008726 - -
Year 1 3446342 -6562384 3446342 0.8696 2996819
Year 2 3973730 -2588654 7420072 0.7561 3004711
Year 3 3957873 1369219 11377945 0.6575 2602366
Year 4 3225096 4594315 14603041 0.5718 1843959
TOTAL 10447855


The Net NPV after 4 years is 439129

(10447855 - 10008726 )






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 (10008726) -10008726 - -
Year 1 3446342 -6562384 3446342 0.8333 2871952
Year 2 3973730 -2588654 7420072 0.6944 2759535
Year 3 3957873 1369219 11377945 0.5787 2290436
Year 4 3225096 4594315 14603041 0.4823 1555313
TOTAL 9477235


The Net NPV after 4 years is -531491

At 20% discount rate the NPV is negative (9477235 - 10008726 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Matrix Bosses 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 Matrix Bosses has a NPV value higher than Zero then finance managers at Matrix Bosses 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 Matrix Bosses, then the stock price of the Matrix Bosses 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 Matrix Bosses 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 can impact the cash flow of the project.

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 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.

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

Nick Shreiber, Mike Rosenberg (2018), "How to Make the Matrix Work: Answering to Multiple Bosses Harvard Business Review Case Study. Published by HBR Publications.