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Saskatchewan Provincial Park Campsite Management and Reservation System 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 Saskatchewan Provincial Park Campsite Management and Reservation System case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Saskatchewan Provincial Park Campsite Management and Reservation System case study is a Harvard Business School (HBR) case study written by Nicole R.D. Haggerty, William Bonner. The Saskatchewan Provincial Park Campsite Management and Reservation System (referred as “Park Campground” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, IT, Project management, Research & development.

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 Saskatchewan Provincial Park Campsite Management and Reservation System Case Study


The manager of Visitor Services with Saskatchewan Park Services (Park Services) was thinking ahead to next year, even though 2011 was still four months away. Park Services had experienced a number of turbulent years around the provincial park campground reservation system. While the problems experienced were largely invisible to the public placing reservations for campgrounds, over the years the behind the scenes machinations required to process campground reservations has placed an onerous burden on Park Services staff, both in Regina and the local provincial parks. Additionally, the present system severely limited the type of services that could be developed for tourists and campers due to the lack of quality data on campers. While steps had been taken in 2009 and 2010 to address some of the major problems surrounding the campground reservation system, serious issues remained that required action. This was particularly true when the system in place in Saskatchewan was compared to new campground reservation systems recently employed in Alberta, Manitoba and the federal national park system. The manager reflected on the turbulent 2008 season, the relative calm in 2009 due to the success of the temporary fixes and the new issues that had arisen in 2010. She was feeling the need to move forward and decide on a more permanent solution that resolved the operational problems of the present reservation system while also laying the foundation for improved services for campers.


Case Authors : Nicole R.D. Haggerty, William Bonner

Topic : Technology & Operations

Related Areas : IT, Project management, Research & development




Calculating Net Present Value (NPV) at 6% for Saskatchewan Provincial Park Campsite Management and Reservation System Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10014066) -10014066 - -
Year 1 3446152 -6567914 3446152 0.9434 3251087
Year 2 3961393 -2606521 7407545 0.89 3525626
Year 3 3958072 1351551 11365617 0.8396 3323274
Year 4 3238702 4590253 14604319 0.7921 2565355
TOTAL 14604319 12665341


The Net Present Value at 6% discount rate is 2651275

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Park Campground 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 Park Campground 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 Saskatchewan Provincial Park Campsite Management and Reservation System

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 Park Campground 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 Park Campground 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 (10014066) -10014066 - -
Year 1 3446152 -6567914 3446152 0.8696 2996654
Year 2 3961393 -2606521 7407545 0.7561 2995382
Year 3 3958072 1351551 11365617 0.6575 2602497
Year 4 3238702 4590253 14604319 0.5718 1851738
TOTAL 10446271


The Net NPV after 4 years is 432205

(10446271 - 10014066 )






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 (10014066) -10014066 - -
Year 1 3446152 -6567914 3446152 0.8333 2871793
Year 2 3961393 -2606521 7407545 0.6944 2750967
Year 3 3958072 1351551 11365617 0.5787 2290551
Year 4 3238702 4590253 14604319 0.4823 1561874
TOTAL 9475186


The Net NPV after 4 years is -538880

At 20% discount rate the NPV is negative (9475186 - 10014066 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Park Campground 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 Park Campground has a NPV value higher than Zero then finance managers at Park Campground 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 Park Campground, then the stock price of the Park Campground 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 Park Campground 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.

What can impact the cash flow of 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.

Understanding of risks involved in 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.




References & Further Readings

Nicole R.D. Haggerty, William Bonner (2018), "Saskatchewan Provincial Park Campsite Management and Reservation System Harvard Business Review Case Study. Published by HBR Publications.