Set Up Remote Workers to Thrive 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 Set Up Remote Workers to Thrive case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Set Up Remote Workers to Thrive case study is a Harvard Business School (HBR) case study written by Jay Mulki, Fleura Bardhi, Felicia Lassk, Jayne Nanavaty-Dahl. The Set Up Remote Workers to Thrive (referred as “Remote Compensating” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Market research, Operations management.

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 Set Up Remote Workers to Thrive Case Study

This is an MIT Sloan Management Review article. During the last decade, virtual work -professionals working remotely from home, from client locations or simply from the road -has become increasingly prevalent. Some Fortune 500 companies, including Procter & Gamble, IBM, Accenture and AT&T, have already partially or fully eliminated traditional offices. As much as 10% of today's work force telecommutes from home -more than triple the level of 2000. This trend will accelerate in the coming decades in response to the ongoing globalization of work, ever-increasing customer demands and the cost and time of commuting. However, remote employees as well as managers are becoming increasingly aware of the challenges associated with virtual work as they relate to internal communication, social interaction and employee satisfaction and commitment. The article focuses on four critical challenges involving remote work that require management attention: (1) finding the right work-life balance, (2) overcoming workplace isolation, (3) compensating for the lack of face-to-face communication and (4) compensating for the lack of visibility. For each issue, the authors offer a set of management coping strategies drawn from interviews with managers and remote workers. Successful companies will find ways to adjust to the differences and provide specialized training, mentoring and broad opportunities for social and business interactions with both traditional and remote employees.

Case Authors : Jay Mulki, Fleura Bardhi, Felicia Lassk, Jayne Nanavaty-Dahl

Topic : Technology & Operations

Related Areas : Market research, Operations management

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Calculating Net Present Value (NPV) at 6% for Set Up Remote Workers to Thrive Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009069)	-10009069	-	-
Year 1	3460736	-6548333	3460736	0.9434	3264845
Year 2	3956434	-2591899	7417170	0.89	3521212
Year 3	3951343	1359444	11368513	0.8396	3317624
Year 4	3240384	4599828	14608897	0.7921	2566688
TOTAL			14608897		12670369

The Net Present Value at 6% discount rate is 2661300

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. Payback Period
2. Net Present Value
3. Profitability Index
4. Internal Rate of Return

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. Remote Compensating 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 Remote Compensating have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Set Up Remote Workers to Thrive

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 Remote Compensating 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 Remote Compensating 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	(10009069)	-10009069	-	-
Year 1	3460736	-6548333	3460736	0.8696	3009336
Year 2	3956434	-2591899	7417170	0.7561	2991633
Year 3	3951343	1359444	11368513	0.6575	2598072
Year 4	3240384	4599828	14608897	0.5718	1852700
TOTAL					10451740

The Net NPV after 4 years is 442671

(10451740 - 10009069 )

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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	(10009069)	-10009069	-	-
Year 1	3460736	-6548333	3460736	0.8333	2883947
Year 2	3956434	-2591899	7417170	0.6944	2747524
Year 3	3951343	1359444	11368513	0.5787	2286657
Year 4	3240384	4599828	14608897	0.4823	1562685
TOTAL					9480812

The Net NPV after 4 years is -528257

At 20% discount rate the NPV is negative (9480812 - 10009069 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Remote Compensating 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 Remote Compensating has a NPV value higher than Zero then finance managers at Remote Compensating 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 Remote Compensating, then the stock price of the Remote Compensating 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 Remote Compensating 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 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.

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.

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 Set Up Remote Workers to Thrive

References & Further Readings

Jay Mulki, Fleura Bardhi, Felicia Lassk, Jayne Nanavaty-Dahl (2018), "Set Up Remote Workers to Thrive Harvard Business Review Case Study. Published by HBR Publications.