TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers 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 TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers case study is a Harvard Business School (HBR) case study written by Kelechi Weze, Susan Madden. The TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers (referred as “Traumalink Jon” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, .

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 TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers Case Study

This case describes the challenges facing Jon Moussally, the CEO of TraumaLink, a four-year-old social venture that provided trauma first aid to victims of traffic injuries in Bangladesh, a country that had some of the most dangerous highways in the world but no formal emergency response system. Jon, a practicing emergency room physician and public health student, had been shocked by the chaotic traffic that he observed during a trip to Dhaka, Bangladesh, for a course on global health issues. Over the next 18 months, Jon and three partners-two fellow students and the Bangladeshi head of a local social venture organization-decided on a three-pronged approach: they would train community-based volunteers who lived or worked close to the highway to provide free basic trauma first aid; they would develop an easy-to-use 911-type software system to deploy volunteers quickly to a crash scene; and they planned to raise operating funds by selling advertising or subscriptions to companies in Bangladesh whose workers travelled the dangerous highways daily. By the fall of 2017, TraumaLink had been successfully launched along two sections of particularly dangerous highways. Their trained volunteers had been able to quickly and effectively provide first aid to victims of traffic injuries. The software had worked well to notify and deploy volunteers and collect data. However, Jon and his partners had not yet found sustainable, long-term sources of revenue, despite almost four years of trying. After an initial pilot phase in November 2014, the organization had been awarded $142,500 by the US Agency for International Development, but these funds would run out by the end of 2018, with little chance of another round. TraumaLink had proven that they could deliver emergency services and save lives, but could Jon and his partners figure out how to become financially sustainable so that they could continue to support and expand their services within Bangladesh and possibly beyond?

Case Authors : Kelechi Weze, Susan Madden

Topic : Innovation & Entrepreneurship

Related Areas :

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Calculating Net Present Value (NPV) at 6% for TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10022761)	-10022761	-	-
Year 1	3468778	-6553983	3468778	0.9434	3272432
Year 2	3955386	-2598597	7424164	0.89	3520279
Year 3	3962779	1364182	11386943	0.8396	3327226
Year 4	3247456	4611638	14634399	0.7921	2572289
TOTAL			14634399		12692227

The Net Present Value at 6% discount rate is 2669466

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. Payback Period
2. Net Present Value
3. Profitability Index
4. Internal Rate of Return

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. Traumalink Jon 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 Traumalink Jon 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 TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers

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 Traumalink Jon 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 Traumalink Jon 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	(10022761)	-10022761	-	-
Year 1	3468778	-6553983	3468778	0.8696	3016329
Year 2	3955386	-2598597	7424164	0.7561	2990840
Year 3	3962779	1364182	11386943	0.6575	2605592
Year 4	3247456	4611638	14634399	0.5718	1856744
TOTAL					10469504

The Net NPV after 4 years is 446743

(10469504 - 10022761 )

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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	(10022761)	-10022761	-	-
Year 1	3468778	-6553983	3468778	0.8333	2890648
Year 2	3955386	-2598597	7424164	0.6944	2746796
Year 3	3962779	1364182	11386943	0.5787	2293275
Year 4	3247456	4611638	14634399	0.4823	1566096
TOTAL					9496815

The Net NPV after 4 years is -525946

At 20% discount rate the NPV is negative (9496815 - 10022761 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Traumalink Jon 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 Traumalink Jon has a NPV value higher than Zero then finance managers at Traumalink Jon 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 Traumalink Jon, then the stock price of the Traumalink Jon 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 Traumalink Jon 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 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 can impact the cash flow of the project.

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

Understanding of risks involved in 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.

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Negotiation Strategy of TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers

References & Further Readings

Kelechi Weze, Susan Madden (2018), "TraumaLink: Providing Trauma First Aid Services in Bangladesh Using Trained Volunteers Harvard Business Review Case Study. Published by HBR Publications.