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UK Government Digital Service: Moving Beyond a Website 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 UK Government Digital Service: Moving Beyond a Website case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. UK Government Digital Service: Moving Beyond a Website case study is a Harvard Business School (HBR) case study written by David Eaves, Daniel Goldberg. The UK Government Digital Service: Moving Beyond a Website (referred as “Gds Government” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, IT, Project 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




Case Description of UK Government Digital Service: Moving Beyond a Website Case Study


In 2011, the UK founded a new government agency known as the "Government Digital Service" (or GDS). Facing significant budget challenges, several high profile IT failures, and growing demands to "modernize" government services, the government set a mission for GDS to champion a "digital culture" in government, ideally unleashing a wave of both cost savings and innovations. By 2012, GDS had identified billions of pounds of potential savings, centralized the government's web presence into a single domain (called GOV.UK), and received wide acclaim from technology commentators. However, the leaders of GDS felt there was significantly more work to be done--not only modernizing government services, but also convincing civil service to focus more on implementation, user needs, and digital services. This case provides an overview of GDS's work up to 2012, and considers the strategy and change management questions facing the agency as it seeks to expand. Case number 2106.0


Case Authors : David Eaves, Daniel Goldberg

Topic : Global Business

Related Areas : IT, Project management




Calculating Net Present Value (NPV) at 6% for UK Government Digital Service: Moving Beyond a Website Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10006120) -10006120 - -
Year 1 3461510 -6544610 3461510 0.9434 3265575
Year 2 3968938 -2575672 7430448 0.89 3532341
Year 3 3942411 1366739 11372859 0.8396 3310124
Year 4 3222491 4589230 14595350 0.7921 2552515
TOTAL 14595350 12660555


The Net Present Value at 6% discount rate is 2654435

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. Internal Rate of Return
2. Profitability Index
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. Timing of the expected cash flows – stockholders of Gds Government 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. Gds Government 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 UK Government Digital Service: Moving Beyond a Website

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 Global Business 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 Gds Government 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 Gds Government 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 (10006120) -10006120 - -
Year 1 3461510 -6544610 3461510 0.8696 3010009
Year 2 3968938 -2575672 7430448 0.7561 3001087
Year 3 3942411 1366739 11372859 0.6575 2592199
Year 4 3222491 4589230 14595350 0.5718 1842470
TOTAL 10445765


The Net NPV after 4 years is 439645

(10445765 - 10006120 )






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 (10006120) -10006120 - -
Year 1 3461510 -6544610 3461510 0.8333 2884592
Year 2 3968938 -2575672 7430448 0.6944 2756207
Year 3 3942411 1366739 11372859 0.5787 2281488
Year 4 3222491 4589230 14595350 0.4823 1554056
TOTAL 9476343


The Net NPV after 4 years is -529777

At 20% discount rate the NPV is negative (9476343 - 10006120 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Gds Government 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 Gds Government has a NPV value higher than Zero then finance managers at Gds Government 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 Gds Government, then the stock price of the Gds Government 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 Gds Government 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 can impact the cash flow of the project.

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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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.




References & Further Readings

David Eaves, Daniel Goldberg (2018), "UK Government Digital Service: Moving Beyond a Website Harvard Business Review Case Study. Published by HBR Publications.