The Flare and Focus of Successful Futurists 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 Flare and Focus of Successful Futurists case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Flare and Focus of Successful Futurists case study is a Harvard Business School (HBR) case study written by Amy Webb. The The Flare and Focus of Successful Futurists (referred as “Futurists Patterns” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. 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 Flare and Focus of Successful Futurists Case Study

This is an MIT Sloan Management Review article. Futurists are skilled at listening to and interpreting signals. They look for early patterns on the fringe, before those "pretrends"begin moving toward the mainstream. Although futurists know most patterns will come to nothing, they watch and wait and test the patterns to find the few that will evolve into genuine trends. The art of forecasting the future, author Amy Webb notes, involves "simultaneously recognizing patterns in the present and thinking about how those changes will impact the future so that you can be actively engaged in building what happens next."Organizations that are able to track emerging trends have opportunities to converse and collaborate with those in other fields to plan ahead. Although it's rare for companies to have their own in-house futurists, Webb argues that forward-thinking organizations can develop their capabilities for foresight by combining creative perspectives with logic-oriented ones. BlackBerry Ltd.'s inability to reconcile different views, she writes, contributed to the decline of the company's smartphone business. BlackBerry's smartphone experience, she concludes, "suggests that forecasting the future of a product, company, or industry should neither be relegated to inventive visionaries nor mapped entirely by left-brain thinkers." In this article, Webb offers a six-step process for identifying trends. To begin with, she advises keeping an open mind and gathering information from the fringe without judgment. This involves creating a map of what you observe at the fringe. Next, she proposes narrowing the research and uncovering the hidden patterns to spot trends. The third step is asking questions to determine whether the patterns you observe are really trends. The fourth step involves interpreting the trend and ensuring that the timing is right for the organization. This includes looking at how external factors (such as a change in government leadership or a natural disaster) could affect the trend's development. Once organizations have identified trends, Webb recommends two final steps: developing scenarios involving "probable, plausible, and possible futures"and creating a strategy based on that analysis; and testing and questioning the strategy you're proposing.

Case Authors : Amy Webb

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for The Flare and Focus of Successful Futurists Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018574)	-10018574	-	-
Year 1	3465802	-6552772	3465802	0.9434	3269625
Year 2	3972857	-2579915	7438659	0.89	3535829
Year 3	3974774	1394859	11413433	0.8396	3337297
Year 4	3229084	4623943	14642517	0.7921	2557737
TOTAL			14642517		12700487

The Net Present Value at 6% discount rate is 2681913

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. Internal Rate of Return
3. Net Present Value
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Futurists Patterns 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 Futurists Patterns 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 The Flare and Focus of Successful Futurists

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 Leadership & Managing People 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 Futurists Patterns 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 Futurists Patterns 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	(10018574)	-10018574	-	-
Year 1	3465802	-6552772	3465802	0.8696	3013741
Year 2	3972857	-2579915	7438659	0.7561	3004051
Year 3	3974774	1394859	11413433	0.6575	2613478
Year 4	3229084	4623943	14642517	0.5718	1846239
TOTAL					10477509

The Net NPV after 4 years is 458935

(10477509 - 10018574 )

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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	(10018574)	-10018574	-	-
Year 1	3465802	-6552772	3465802	0.8333	2888168
Year 2	3972857	-2579915	7438659	0.6944	2758928
Year 3	3974774	1394859	11413433	0.5787	2300216
Year 4	3229084	4623943	14642517	0.4823	1557236
TOTAL					9504549

The Net NPV after 4 years is -514025

At 20% discount rate the NPV is negative (9504549 - 10018574 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Futurists Patterns 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 Futurists Patterns has a NPV value higher than Zero then finance managers at Futurists Patterns 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 Futurists Patterns, then the stock price of the Futurists Patterns 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 Futurists Patterns 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 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.

What can impact the cash flow of 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 The Flare and Focus of Successful Futurists

References & Further Readings

Amy Webb (2018), "The Flare and Focus of Successful Futurists Harvard Business Review Case Study. Published by HBR Publications.