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Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D) 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 Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D) case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D) case study is a Harvard Business School (HBR) case study written by George F. Halow, Brian Talbot. The Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D) (referred as “Andrea Career” 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






Case Description of Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D) Case Study


Supplement to case W97A17. In this set of six cases, students are placed into the role of the fictional Andrea Johnson, a recent graduate who has just begun her career at a mid-sized organization in the consumer electronics industry. While in the role of Andrea, university students and early-stage professionals follow Andrea's career development and are exposed to a variety of ethical challenges she encounters along the way. Each hypothetical scenario is based on real-world events and will illustrate the types of situations that students may encounter in the course of their career. The cases may be taught sequentially or as standalone scenarios. Case A is delivered in the inspection copy and purchased copy, and Cases B - F are delivered alongside the teaching note. A slide deck accompanies the comprehensive teaching note that provides an in-depth analysis of each scenario with tips on promoting student engagement to create an active and dynamic learning environment. The intent of the case series is to enable students to develop fundamental tools for how to recognize, address, and successfully overcome compromising situations.


Case Authors : George F. Halow, Brian Talbot

Topic : Leadership & Managing People

Related Areas :




Calculating Net Present Value (NPV) at 6% for Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D) Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10023260) -10023260 - -
Year 1 3452238 -6571022 3452238 0.9434 3256828
Year 2 3968022 -2603000 7420260 0.89 3531525
Year 3 3974087 1371087 11394347 0.8396 3336720
Year 4 3250076 4621163 14644423 0.7921 2574365
TOTAL 14644423 12699438




The Net Present Value at 6% discount rate is 2676178

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 Andrea Career 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. Andrea Career 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 Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D)

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 Andrea Career 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 Andrea Career 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 (10023260) -10023260 - -
Year 1 3452238 -6571022 3452238 0.8696 3001946
Year 2 3968022 -2603000 7420260 0.7561 3000395
Year 3 3974087 1371087 11394347 0.6575 2613027
Year 4 3250076 4621163 14644423 0.5718 1858242
TOTAL 10473609


The Net NPV after 4 years is 450349

(10473609 - 10023260 )








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 (10023260) -10023260 - -
Year 1 3452238 -6571022 3452238 0.8333 2876865
Year 2 3968022 -2603000 7420260 0.6944 2755571
Year 3 3974087 1371087 11394347 0.5787 2299819
Year 4 3250076 4621163 14644423 0.4823 1567359
TOTAL 9499614


The Net NPV after 4 years is -523646

At 20% discount rate the NPV is negative (9499614 - 10023260 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Andrea Career 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 Andrea Career has a NPV value higher than Zero then finance managers at Andrea Career 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 Andrea Career, then the stock price of the Andrea Career 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 Andrea Career 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.

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.

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.

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 Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D)

References & Further Readings

George F. Halow, Brian Talbot (2018), "Ethics and Integrity in Business: Navigating Ethical Risks and Transgressions in the Workplace (D) Harvard Business Review Case Study. Published by HBR Publications.


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