Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals 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 Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals case study is a Harvard Business School (HBR) case study written by Rahul Kumar, Sandhya Shenoy, Unnikrishnan Dinesh Kumar. The Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals (referred as “Nps Manipal” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customers.

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 Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals Case Study

Manipal Hospitals, which was started in 1953, had the advantage of being the "oldest" healthcare group in India. In six decades, the group could establish the reputation for being ethical and patient friendly. In 2017, Manipal Hospitals catered to around 2 million customers from India and overseas every year through their tertiary and secondary care facilities. In 2017, MHE managed an aggregate of 5,200 plus beds among 16 hospitals, over 13 locations across 6 states in India and one hospital in Klang, Malaysia. The Group's acute care flagship quaternary care facility located in the heart of Bangalore, India's IT capital was set up in 1991. The 680-bed Manipal Hospital at HAL Airport Road provided care in over 60 specialties under one roof. Ajay Bakshi, MD and CEO of Manipal Hospitals strongly believed that the word-of-mouth (WOM) is much stronger than any other type of promotion and thus it is important for MHE to keep customers informed about the improvements. With the improved system for feedback collection, he was confident of moving towards a more tangible outcome from feedback collection. Collecting Net Promoters Score (NPS) and tracking the trend of NPS was an integral part of patient care at MHE. He also believed that closing the loop is a central theme of the Net Promoter Score and thus NPS should be pivotal to understanding the deficiencies in the system and improving it. Ajay believed that NPS score itself is just the tip of the iceberg. The real value was provided by understanding what leads to the NPS score, especially the causes of detractors and promoters and asking follow-up questions on the reason for the score. It provided a gold mine of information which can be used to improve patient care.

Case Authors : Rahul Kumar, Sandhya Shenoy, Unnikrishnan Dinesh Kumar

Topic : Sales & Marketing

Related Areas : Customers

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Calculating Net Present Value (NPV) at 6% for Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10008089)	-10008089	-	-
Year 1	3469412	-6538677	3469412	0.9434	3273030
Year 2	3977883	-2560794	7447295	0.89	3540302
Year 3	3953696	1392902	11400991	0.8396	3319599
Year 4	3222842	4615744	14623833	0.7921	2552793
TOTAL			14623833		12685724

The Net Present Value at 6% discount rate is 2677635

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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Nps Manipal 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 Nps Manipal 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 Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals

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 Sales & Marketing 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 Nps Manipal 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 Nps Manipal 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	(10008089)	-10008089	-	-
Year 1	3469412	-6538677	3469412	0.8696	3016880
Year 2	3977883	-2560794	7447295	0.7561	3007851
Year 3	3953696	1392902	11400991	0.6575	2599619
Year 4	3222842	4615744	14623833	0.5718	1842670
TOTAL					10467021

The Net NPV after 4 years is 458932

(10467021 - 10008089 )

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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	(10008089)	-10008089	-	-
Year 1	3469412	-6538677	3469412	0.8333	2891177
Year 2	3977883	-2560794	7447295	0.6944	2762419
Year 3	3953696	1392902	11400991	0.5787	2288019
Year 4	3222842	4615744	14623833	0.4823	1554226
TOTAL					9495839

The Net NPV after 4 years is -512250

At 20% discount rate the NPV is negative (9495839 - 10008089 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nps Manipal 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 Nps Manipal has a NPV value higher than Zero then finance managers at Nps Manipal 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 Nps Manipal, then the stock price of the Nps Manipal 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 Nps Manipal 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.

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.

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

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 Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals

References & Further Readings

Rahul Kumar, Sandhya Shenoy, Unnikrishnan Dinesh Kumar (2018), "Predicting Net Promoter Score (NPS) to Improve Patient Experience at Manipal Hospitals Harvard Business Review Case Study. Published by HBR Publications.