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For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise 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 For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise case study is a Harvard Business School (HBR) case study written by Kent Walker, Ian Stecher, Francine Schlosser, Megain O'Neil-Renaud. The For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise (referred as “Laundry Social” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Social enterprise.

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 For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise Case Study


The London, Ontario, social enterprise For the Love of Laundry was founded in 2014 with the intention of selling homemade, eco-friendly soaps and using the profits to fund free laundry events in the community. In 2017, the founder's goal was to increase the scale of the business and its social impact. She needed to decide how to structure the organization to increase its scale while maintaining control of its strategic direction. The founder compared the pros and cons of the four organizational structures available for social enterprises in Canada-for-profit organization, non-profit organization, registered charity, and co-operative-to decide which option would best suit the organization. She wanted to ensure that the organization's social aspect remained central while she sought funds to increase its scale. She needed to balance the triple bottom line, but with a primary focus on the social component. She also needed to consider the importance of corporate identity for social enterprises in the scaling process. Kent Walker is affiliated with University of Windsor.


Case Authors : Kent Walker, Ian Stecher, Francine Schlosser, Megain O'Neil-Renaud

Topic : Innovation & Entrepreneurship

Related Areas : Social enterprise




Calculating Net Present Value (NPV) at 6% for For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10021654) -10021654 - -
Year 1 3455535 -6566119 3455535 0.9434 3259939
Year 2 3956481 -2609638 7412016 0.89 3521254
Year 3 3974294 1364656 11386310 0.8396 3336894
Year 4 3232677 4597333 14618987 0.7921 2560583
TOTAL 14618987 12678670




The Net Present Value at 6% discount rate is 2657016

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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Laundry Social 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 Laundry Social have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise

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 Innovation & Entrepreneurship 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 Laundry Social 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 Laundry Social 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 (10021654) -10021654 - -
Year 1 3455535 -6566119 3455535 0.8696 3004813
Year 2 3956481 -2609638 7412016 0.7561 2991668
Year 3 3974294 1364656 11386310 0.6575 2613163
Year 4 3232677 4597333 14618987 0.5718 1848294
TOTAL 10457937


The Net NPV after 4 years is 436283

(10457937 - 10021654 )








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 (10021654) -10021654 - -
Year 1 3455535 -6566119 3455535 0.8333 2879613
Year 2 3956481 -2609638 7412016 0.6944 2747556
Year 3 3974294 1364656 11386310 0.5787 2299939
Year 4 3232677 4597333 14618987 0.4823 1558968
TOTAL 9486076


The Net NPV after 4 years is -535578

At 20% discount rate the NPV is negative (9486076 - 10021654 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Laundry Social 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 Laundry Social has a NPV value higher than Zero then finance managers at Laundry Social 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 Laundry Social, then the stock price of the Laundry Social 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 Laundry Social 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 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 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 For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise

References & Further Readings

Kent Walker, Ian Stecher, Francine Schlosser, Megain O'Neil-Renaud (2018), "For the Love of Laundry: Comparing Organizational Forms to Scale a Social Enterprise Harvard Business Review Case Study. Published by HBR Publications.


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