Developing Nurse Practioners at the College of St. Catherine 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 Developing Nurse Practioners at the College of St. Catherine case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Developing Nurse Practioners at the College of St. Catherine case study is a Harvard Business School (HBR) case study written by Clayton M. Christensen, Sarah Thorp. The Developing Nurse Practioners at the College of St. Catherine (referred as “Nurse Clinic” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Disruptive innovation, Leadership, Organizational culture, Social enterprise, Supply chain.

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 Developing Nurse Practioners at the College of St. Catherine Case Study

Margaret McLaughlin has just begun her new appointment as the Dean of Health Professions at the College of St. Catherine in Minneapolis/St. Paul, Minnesota. As an education leader, her charge is to develop Minnesota's health care workforce for the future. She is approached by members of her nursing faculty, who want her to consider launching their very own nurse-practitioner-run clinic. Typically, clinics have been run and directed by physicians. The faculty have suggested four options for the kind of clinic they might run, and McLaughlin must advise them on a course of action. Teaching Purpose: Students will select the kind of nurse practitioner clinic that would be most appropriate for the College of St. Catherine. The analysis will begin by examining the context in which the college is operating and discuss the major criteria that need to be used in making this decision. They will consider the move "up-market" for nurse practitioners' over time, as they have taken on more responsibilities similar in nature to those of a physician. Specifically, students will discuss how nurse practitioners' work has changed over time and the regulations, technological innovations, patient needs, and infrastructure developments that have encouraged this change. Finally, students will debate whether it would make sense to launch their own clinic. They will choose among four options for how the clinic might look, whom it would serve, and how it would be organized.

Case Authors : Clayton M. Christensen, Sarah Thorp

Topic : Technology & Operations

Related Areas : Disruptive innovation, Leadership, Organizational culture, Social enterprise, Supply chain

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Calculating Net Present Value (NPV) at 6% for Developing Nurse Practioners at the College of St. Catherine Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10011563)	-10011563	-	-
Year 1	3447665	-6563898	3447665	0.9434	3252514
Year 2	3962236	-2601662	7409901	0.89	3526376
Year 3	3947431	1345769	11357332	0.8396	3314339
Year 4	3231096	4576865	14588428	0.7921	2559331
TOTAL			14588428		12652560

The Net Present Value at 6% discount rate is 2640997

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. Payback Period
4. Net Present Value

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 Nurse Clinic 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. Nurse Clinic 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 Developing Nurse Practioners at the College of St. Catherine

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 Technology & Operations 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 Nurse Clinic 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 Nurse Clinic 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	(10011563)	-10011563	-	-
Year 1	3447665	-6563898	3447665	0.8696	2997970
Year 2	3962236	-2601662	7409901	0.7561	2996020
Year 3	3947431	1345769	11357332	0.6575	2595500
Year 4	3231096	4576865	14588428	0.5718	1847390
TOTAL					10436879

The Net NPV after 4 years is 425316

(10436879 - 10011563 )

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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	(10011563)	-10011563	-	-
Year 1	3447665	-6563898	3447665	0.8333	2873054
Year 2	3962236	-2601662	7409901	0.6944	2751553
Year 3	3947431	1345769	11357332	0.5787	2284393
Year 4	3231096	4576865	14588428	0.4823	1558206
TOTAL					9467206

The Net NPV after 4 years is -544357

At 20% discount rate the NPV is negative (9467206 - 10011563 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nurse Clinic 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 Nurse Clinic has a NPV value higher than Zero then finance managers at Nurse Clinic 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 Nurse Clinic, then the stock price of the Nurse Clinic 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 Nurse Clinic 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 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.

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 Developing Nurse Practioners at the College of St. Catherine

References & Further Readings

Clayton M. Christensen, Sarah Thorp (2018), "Developing Nurse Practioners at the College of St. Catherine Harvard Business Review Case Study. Published by HBR Publications.