Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks 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 Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks case study is a Harvard Business School (HBR) case study written by Duy Dang-Pham, Siddhi Pittayachawan, Vince Bruno. The Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks (referred as “Security Sharing” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Networking, Security & privacy.

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 Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks Case Study

While extant research has studied the motivations of individualistic security compliance, this study explains what motivates employees to share security advice and troubleshoot with others. We argue that such findings are crucial for the development of people-centric security workplaces, where desirable security behaviors are disseminated amongst the employees. In this research, we applied network analysis techniques to perform two tasks. First, we explored the structural patterns of employees' sharing of security advice and troubleshooting. Second, we evaluated the effects of security climate perceptions, perceived accountability, and personal attributes on those sharing activities. While the sharing network was found to be thin and sparse, perceptions of direct a supervisor's security practices and accountability for security tasks can increase sharing. Age, seniority, and tenure-as well as having the same gender and department membership-can also motivate sharing. In contrast, security climate perceptions of coworkers and top management's security practices were found to discourage sharing. Our practical recommendations focus on the strategies to maximize security engagement in the workplace. Potential ideas for future research are also discussed in detail. Most importantly, we hope to offer this research as the foundation for future network studies in the behavioral security field.

Case Authors : Duy Dang-Pham, Siddhi Pittayachawan, Vince Bruno

Topic : Technology & Operations

Related Areas : Networking, Security & privacy

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Calculating Net Present Value (NPV) at 6% for Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018925)	-10018925	-	-
Year 1	3462802	-6556123	3462802	0.9434	3266794
Year 2	3969672	-2586451	7432474	0.89	3532994
Year 3	3973834	1387383	11406308	0.8396	3336508
Year 4	3230925	4618308	14637233	0.7921	2559195
TOTAL			14637233		12695491

The Net Present Value at 6% discount rate is 2676566

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. Internal Rate of Return
2. Payback Period
3. Profitability Index
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 Security Sharing 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. Security Sharing 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 Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks

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 Security Sharing 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 Security Sharing 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	(10018925)	-10018925	-	-
Year 1	3462802	-6556123	3462802	0.8696	3011132
Year 2	3969672	-2586451	7432474	0.7561	3001642
Year 3	3973834	1387383	11406308	0.6575	2612860
Year 4	3230925	4618308	14637233	0.5718	1847292
TOTAL					10472927

The Net NPV after 4 years is 454002

(10472927 - 10018925 )

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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	(10018925)	-10018925	-	-
Year 1	3462802	-6556123	3462802	0.8333	2885668
Year 2	3969672	-2586451	7432474	0.6944	2756717
Year 3	3973834	1387383	11406308	0.5787	2299672
Year 4	3230925	4618308	14637233	0.4823	1558124
TOTAL					9500181

The Net NPV after 4 years is -518744

At 20% discount rate the NPV is negative (9500181 - 10018925 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Security Sharing 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 Security Sharing has a NPV value higher than Zero then finance managers at Security Sharing 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 Security Sharing, then the stock price of the Security Sharing 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 Security Sharing 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.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

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 Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks

References & Further Readings

Duy Dang-Pham, Siddhi Pittayachawan, Vince Bruno (2018), "Impacts of Security Climate on Employees' Sharing of Security Advice and Troubleshooting: Empirical Networks Harvard Business Review Case Study. Published by HBR Publications.