The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs? 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 The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs? case study is a Harvard Business School (HBR) case study written by Lorenzo Bizzi. The The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs? (referred as “Media Coworkers” from here on) case study provides evaluation & decision scenario in field of Communication. It also touches upon business topics such as - Value proposition, Policy, Social platforms, Strategy, Talent 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

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Case Description of The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs? Case Study

Companies are increasingly encouraging employees to use Facebook and other social media to interact with coworkers in order to empower collaboration and knowledge sharing. Yet, there is a hidden problem that has been neglected by managers. The more employees interact with coworkers through social media to facilitate their work in the organization, the more likely they are to learn about and become interested in other companies via social media, form new work connections outside the organization, and engage in job search behaviors. The use of social media to facilitate work and benefit organizations could paradoxically risk fostering withdrawal intentions and turnover, which damage organizations. This article provides evidence of this paradox from an empirical study. After having identified the problem, the article proposes both the solutions to avoid and the solutions to adopt, illustrating best practices from successful companies, comparing their benefits and costs, and indicating the situations in which each solution is best implemented. To conclude, I offer 10 recommendations to turn the problem into an opportunity and use social media as an innovative recruitment tool.

Case Authors : Lorenzo Bizzi

Topic : Communication

Related Areas : Policy, Social platforms, Strategy, Talent management

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Calculating Net Present Value (NPV) at 6% for The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10012970)	-10012970	-	-
Year 1	3454594	-6558376	3454594	0.9434	3259051
Year 2	3970229	-2588147	7424823	0.89	3533490
Year 3	3951090	1362943	11375913	0.8396	3317411
Year 4	3224703	4587646	14600616	0.7921	2554267
TOTAL			14600616		12664219

The Net Present Value at 6% discount rate is 2651249

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. Internal Rate of Return
4. Profitability Index

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 Media Coworkers 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. Media Coworkers shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs?

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 Communication 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 Media Coworkers 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 Media Coworkers 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	(10012970)	-10012970	-	-
Year 1	3454594	-6558376	3454594	0.8696	3003995
Year 2	3970229	-2588147	7424823	0.7561	3002064
Year 3	3951090	1362943	11375913	0.6575	2597906
Year 4	3224703	4587646	14600616	0.5718	1843734
TOTAL					10447699

The Net NPV after 4 years is 434729

(10447699 - 10012970 )

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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	(10012970)	-10012970	-	-
Year 1	3454594	-6558376	3454594	0.8333	2878828
Year 2	3970229	-2588147	7424823	0.6944	2757103
Year 3	3951090	1362943	11375913	0.5787	2286510
Year 4	3224703	4587646	14600616	0.4823	1555123
TOTAL					9477565

The Net NPV after 4 years is -535405

At 20% discount rate the NPV is negative (9477565 - 10012970 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Media Coworkers 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 Media Coworkers has a NPV value higher than Zero then finance managers at Media Coworkers 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 Media Coworkers, then the stock price of the Media Coworkers 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 Media Coworkers 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 will be a multi year spillover effect of various taxation regulations.

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 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.

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Negotiation Strategy of The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs?

References & Further Readings

Lorenzo Bizzi (2018), "The Hidden Problem of Facebook and Social Media at Work: What If Employees Start Searching for Other Jobs? Harvard Business Review Case Study. Published by HBR Publications.