The Dark Side of Information Technology 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 The Dark Side of Information Technology case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Dark Side of Information Technology case study is a Harvard Business School (HBR) case study written by Monideepa Tarafdar, John D'Arcy, Ofir Turel, Ashish Gupta. The The Dark Side of Information Technology (referred as “Dark Technostress” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. 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

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Case Description of The Dark Side of Information Technology Case Study

This is an MIT Sloan Management Review article. Information technology has in recent years been viewed as a major contributor to productivity growth. However, in 14 studies that examined the IT use of more than 3,100 employees in 28 organizations in the United States, the authors found a dark side to IT use. Employees can experience "technostress"for a number of reasons. They feel forced to multitask rapidly on simultaneous streams of information from different devices simply because information feeds come at them in real time; remote work and flextime can tether them round the clock to their devices and workplaces; and short technology cycles and pressures from IT vendors mean constantly changing interfaces, screens and functionalities. Ironically, even as they dream of escaping from IT, many employees also confess to feeling "addicted"to some of these stress-causing technologies. Another aspect of the dark side of IT is the threat of employees misusing organizational IT resources and triggering "attacks"of different kinds. To mitigate these problems, the authors suggest that senior executives should encourage employees to be mindful about how they use IT and to develop a deeper understanding of the IT they use at work. The authors also argue that a company's IT leaders have a special responsibility to instruct their organization about pertinent aspects of IT systems and applications that could either exacerbate or mitigate their more negative effects. HR leaders, meanwhile, should start to assess the extent to which employees are experiencing "technostress"or technology addiction and develop programs that encourage responsible IT use. Fortunately, the authors note, a holistic and integrated approach by a company's senior executives, IT leaders and HR leaders can help mitigate the most damaging consequences of the dark side of information technology.

Case Authors : Monideepa Tarafdar, John D'Arcy, Ofir Turel, Ashish Gupta

Topic : Technology & Operations

Related Areas :

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Calculating Net Present Value (NPV) at 6% for The Dark Side of Information Technology Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019031)	-10019031	-	-
Year 1	3459229	-6559802	3459229	0.9434	3263424
Year 2	3968300	-2591502	7427529	0.89	3531773
Year 3	3975417	1383915	11402946	0.8396	3337837
Year 4	3251513	4635428	14654459	0.7921	2575503
TOTAL			14654459		12708536

The Net Present Value at 6% discount rate is 2689505

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. Payback Period
3. Internal Rate of Return
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 Dark Technostress 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. Dark Technostress 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 The Dark Side of Information Technology

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 Dark Technostress 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 Dark Technostress 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	(10019031)	-10019031	-	-
Year 1	3459229	-6559802	3459229	0.8696	3008025
Year 2	3968300	-2591502	7427529	0.7561	3000605
Year 3	3975417	1383915	11402946	0.6575	2613901
Year 4	3251513	4635428	14654459	0.5718	1859063
TOTAL					10481594

The Net NPV after 4 years is 462563

(10481594 - 10019031 )

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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	(10019031)	-10019031	-	-
Year 1	3459229	-6559802	3459229	0.8333	2882691
Year 2	3968300	-2591502	7427529	0.6944	2755764
Year 3	3975417	1383915	11402946	0.5787	2300589
Year 4	3251513	4635428	14654459	0.4823	1568052
TOTAL					9507095

The Net NPV after 4 years is -511936

At 20% discount rate the NPV is negative (9507095 - 10019031 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Dark Technostress 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 Dark Technostress has a NPV value higher than Zero then finance managers at Dark Technostress 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 Dark Technostress, then the stock price of the Dark Technostress 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 Dark Technostress 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.

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 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.

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Negotiation Strategy of The Dark Side of Information Technology

References & Further Readings

Monideepa Tarafdar, John D'Arcy, Ofir Turel, Ashish Gupta (2018), "The Dark Side of Information Technology Harvard Business Review Case Study. Published by HBR Publications.