×




Firestone Liberia's Battle against Ebola 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 Firestone Liberia's Battle against Ebola case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Firestone Liberia's Battle against Ebola case study is a Harvard Business School (HBR) case study written by Timothy Feddersen, Nilima Achwal. The Firestone Liberia's Battle against Ebola (referred as “Liberian Ebola” 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, International business, Leadership, Policy, Public relations, Social responsibility.

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 Firestone Liberia's Battle against Ebola Case Study


This case puts students in the shoes of the Ebola response leadership teams of Firestone Liberia and its parent company, Bridgestone Americas, as they worked together to respond to the deadly 2014 Ebola epidemic. While the companies had received positive press for their containment of the virus on their rubber farm in Liberia, which was home to 8,000 employees and 80,000 Liberian citizens, the situation off the property was worsening. With death counts rising and hospitals across the nation closing as staff caught the virus, the Liberian government declared a national state of emergency. The teams now faced the possibility that the government might attempt to take control of the farm's medical center. How could they balance their duty to care effectively for employees against the demands of the Liberian government? Should they try to fend off the government or cooperate to meet the government's demands? Students will learn how to do a methodical situation analysis that considers ethical obligations and strategic implications, and to distill their recommendation into a briefing for senior leadership.


Case Authors : Timothy Feddersen, Nilima Achwal

Topic : Leadership & Managing People

Related Areas : International business, Leadership, Policy, Public relations, Social responsibility




Calculating Net Present Value (NPV) at 6% for Firestone Liberia's Battle against Ebola Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10016470) -10016470 - -
Year 1 3465112 -6551358 3465112 0.9434 3268974
Year 2 3971513 -2579845 7436625 0.89 3534632
Year 3 3962635 1382790 11399260 0.8396 3327105
Year 4 3249492 4632282 14648752 0.7921 2573902
TOTAL 14648752 12704613




The Net Present Value at 6% discount rate is 2688143

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. Payback Period
3. Internal Rate of Return
4. Profitability Index

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 Liberian Ebola 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. Liberian Ebola 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 Firestone Liberia's Battle against Ebola

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 Liberian Ebola 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 Liberian Ebola 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 (10016470) -10016470 - -
Year 1 3465112 -6551358 3465112 0.8696 3013141
Year 2 3971513 -2579845 7436625 0.7561 3003034
Year 3 3962635 1382790 11399260 0.6575 2605497
Year 4 3249492 4632282 14648752 0.5718 1857908
TOTAL 10479580


The Net NPV after 4 years is 463110

(10479580 - 10016470 )








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 (10016470) -10016470 - -
Year 1 3465112 -6551358 3465112 0.8333 2887593
Year 2 3971513 -2579845 7436625 0.6944 2757995
Year 3 3962635 1382790 11399260 0.5787 2293192
Year 4 3249492 4632282 14648752 0.4823 1567078
TOTAL 9505858


The Net NPV after 4 years is -510612

At 20% discount rate the NPV is negative (9505858 - 10016470 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Liberian Ebola 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 Liberian Ebola has a NPV value higher than Zero then finance managers at Liberian Ebola 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 Liberian Ebola, then the stock price of the Liberian Ebola 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 Liberian Ebola 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 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 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.






Negotiation Strategy of Firestone Liberia's Battle against Ebola

References & Further Readings

Timothy Feddersen, Nilima Achwal (2018), "Firestone Liberia's Battle against Ebola Harvard Business Review Case Study. Published by HBR Publications.


Kwoon Chung Bus SWOT Analysis / TOWS Matrix

Transportation , Misc. Transportation


Infibeam Avenues SWOT Analysis / TOWS Matrix

Services , Retail (Catalog & Mail Order)


JetBlue SWOT Analysis / TOWS Matrix

Transportation , Airline


ATA SWOT Analysis / TOWS Matrix

Services , Business Services


Pearl Global Industries Ltd SWOT Analysis / TOWS Matrix

Consumer Cyclical , Apparel/Accessories


Zhenro Properties SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Pyung Hwa Ind SWOT Analysis / TOWS Matrix

Consumer Cyclical , Auto & Truck Parts