×




Colliers International Property Consultants 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 Colliers International Property Consultants case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Colliers International Property Consultants case study is a Harvard Business School (HBR) case study written by Nitin Nohria, Julie Gladstone. The Colliers International Property Consultants (referred as “Colliers Brokers” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Conflict, Corporate governance, Growth strategy, IT, Joint ventures, Organizational culture, Organizational structure.

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 Colliers International Property Consultants Case Study


Describes the origins, organizational structure, management practices, and use of information technology (IT) in Colliers, a real estate network. Colliers provides local firms with a way to maintain local autonomy while gaining national and international coverage. Through the use of the network's IT, brokers are able to share information, provide consulting-type services, and refer brokers to Colliers brokers in other markets. While a network structure has certain benefits, it also poses control issues: How does the organization generate the full commitment of its members, many of whom are accustomed to working independently in their local market and are not accustomed to soliciting certain information from their clients, providing an expanded range of services, and sharing information with other brokers? If they maintain their network structure, in what ways can the organization grow without creating tensions or diluting its quality? How does such an entity resolve conflicts among its constituents? While many members believe this structure is best suited to prosper, others question the survival of Colliers as it is now.


Case Authors : Nitin Nohria, Julie Gladstone

Topic : Technology & Operations

Related Areas : Conflict, Corporate governance, Growth strategy, IT, Joint ventures, Organizational culture, Organizational structure




Calculating Net Present Value (NPV) at 6% for Colliers International Property Consultants Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10008980) -10008980 - -
Year 1 3450777 -6558203 3450777 0.9434 3255450
Year 2 3971786 -2586417 7422563 0.89 3534875
Year 3 3956365 1369948 11378928 0.8396 3321840
Year 4 3246404 4616352 14625332 0.7921 2571456
TOTAL 14625332 12683622




The Net Present Value at 6% discount rate is 2674642

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. Net Present Value
2. Profitability Index
3. Internal Rate of Return
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 Colliers Brokers 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. Colliers Brokers shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.






Formula and Steps to Calculate Net Present Value (NPV) of Colliers International Property Consultants

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 Colliers Brokers 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 Colliers Brokers 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 (10008980) -10008980 - -
Year 1 3450777 -6558203 3450777 0.8696 3000676
Year 2 3971786 -2586417 7422563 0.7561 3003241
Year 3 3956365 1369948 11378928 0.6575 2601374
Year 4 3246404 4616352 14625332 0.5718 1856142
TOTAL 10461433


The Net NPV after 4 years is 452453

(10461433 - 10008980 )








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 (10008980) -10008980 - -
Year 1 3450777 -6558203 3450777 0.8333 2875648
Year 2 3971786 -2586417 7422563 0.6944 2758185
Year 3 3956365 1369948 11378928 0.5787 2289563
Year 4 3246404 4616352 14625332 0.4823 1565588
TOTAL 9488984


The Net NPV after 4 years is -519996

At 20% discount rate the NPV is negative (9488984 - 10008980 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Colliers Brokers 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 Colliers Brokers has a NPV value higher than Zero then finance managers at Colliers Brokers 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 Colliers Brokers, then the stock price of the Colliers Brokers 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 Colliers Brokers 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 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.

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

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.






Negotiation Strategy of Colliers International Property Consultants

References & Further Readings

Nitin Nohria, Julie Gladstone (2018), "Colliers International Property Consultants Harvard Business Review Case Study. Published by HBR Publications.


Radiant Utama SWOT Analysis / TOWS Matrix

Energy , Oil Well Services & Equipment


Elanix Biotechnologies SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Air Products SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


Yamazaki Baking Co Ltd SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Food Processing


Kpx Green Chem SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


UOL Group SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Liveramp SWOT Analysis / TOWS Matrix

Technology , Computer Services