How Humble Is Your Company Culture? And, Why Does It Matter? 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 How Humble Is Your Company Culture? And, Why Does It Matter? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. How Humble Is Your Company Culture? And, Why Does It Matter? case study is a Harvard Business School (HBR) case study written by Tiffany Maldonado, Dusya Vera, Nichelle Ramos. The How Humble Is Your Company Culture? And, Why Does It Matter? (referred as “Humility Culture” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Organizational culture, Performance measurement.

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 How Humble Is Your Company Culture? And, Why Does It Matter? Case Study

Humility as a virtue of leadership has attracted increased attention in recent years. We introduce the concept of a humble organizational culture and define it as a culture that promotes humility as a key success factor and a source of competitive advantage, and one that institutionalizes six values and norms: (1) employee development, (2) mistake tolerance, (3) transparency, (4) accurate awareness, (5) recognition, and (6) openness. We position a company culture of humility as key to extraordinary success in the marketplace. Humility in individuals includes a willingness to see the self accurately and a propensity to put oneself and others in perspective. In this article, we offer a set of recommendations to help executives build a company culture of humility that supports the six behavioral norms and values that create the foundation for a firm's competitive advantage. We collected information on organizational cultures of humility for a sample of Fortune 500 firms using data from company mission statements, company websites, and news articles.

Case Authors : Tiffany Maldonado, Dusya Vera, Nichelle Ramos

Topic : Organizational Development

Related Areas : Organizational culture, Performance measurement

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Calculating Net Present Value (NPV) at 6% for How Humble Is Your Company Culture? And, Why Does It Matter? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027391)	-10027391	-	-
Year 1	3457787	-6569604	3457787	0.9434	3262063
Year 2	3954332	-2615272	7412119	0.89	3519341
Year 3	3968187	1352915	11380306	0.8396	3331766
Year 4	3226158	4579073	14606464	0.7921	2555419
TOTAL			14606464		12668590

The Net Present Value at 6% discount rate is 2641199

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. Profitability Index
2. Internal Rate of Return
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. Humility Culture 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 Humility Culture 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 How Humble Is Your Company Culture? And, Why Does It Matter?

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 Organizational Development 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 Humility Culture 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 Humility Culture 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	(10027391)	-10027391	-	-
Year 1	3457787	-6569604	3457787	0.8696	3006771
Year 2	3954332	-2615272	7412119	0.7561	2990043
Year 3	3968187	1352915	11380306	0.6575	2609147
Year 4	3226158	4579073	14606464	0.5718	1844566
TOTAL					10450528

The Net NPV after 4 years is 423137

(10450528 - 10027391 )

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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	(10027391)	-10027391	-	-
Year 1	3457787	-6569604	3457787	0.8333	2881489
Year 2	3954332	-2615272	7412119	0.6944	2746064
Year 3	3968187	1352915	11380306	0.5787	2296405
Year 4	3226158	4579073	14606464	0.4823	1555825
TOTAL					9479782

The Net NPV after 4 years is -547609

At 20% discount rate the NPV is negative (9479782 - 10027391 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Humility Culture 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 Humility Culture has a NPV value higher than Zero then finance managers at Humility Culture 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 Humility Culture, then the stock price of the Humility Culture 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 Humility Culture 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 –

Understanding of risks involved in the project.

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.

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.

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 How Humble Is Your Company Culture? And, Why Does It Matter?

References & Further Readings

Tiffany Maldonado, Dusya Vera, Nichelle Ramos (2018), "How Humble Is Your Company Culture? And, Why Does It Matter? Harvard Business Review Case Study. Published by HBR Publications.