Guns and Roses (B): Educating Educators through Peer Coaching Programmes 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 Guns and Roses (B): Educating Educators through Peer Coaching Programmes case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Guns and Roses (B): Educating Educators through Peer Coaching Programmes case study is a Harvard Business School (HBR) case study written by Swee Liang Tan, Michael Netzley, Sarita Mathur. The Guns and Roses (B): Educating Educators through Peer Coaching Programmes (referred as “Coaching Peer” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Education.

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 Guns and Roses (B): Educating Educators through Peer Coaching Programmes Case Study

Supplement to case SMU413. This case is a two-part series on the value of faculty teaching forums and peer coaching programmes in resolving conflicting pedagogical philosophies. Case A is set in September 2009, shortly after James Nelson, assistant professor at Singapore Management University sought guidance from practice associate professor Harry Denon on the issue of declining student ratings of his teaching performance. Den then observes Nelson's lectures, and has in-depth discussions with him on his teaching style. The discussions prove very helpful to Nelson, who is now able to decide how he should approach his class and to what extent he needs to alter his teaching approach. The case looks at the value of feedback received by faculty through various lenses: students, peer and self-reflection. It is highly suitable for faculty development and executive education courses that cover different pedagogical philosophies and the effectiveness of student appraisal processes. In Case B, Nelson reflects on his peer coaching experience and how his thought process has evolved through the course of the coaching programme. He also describes some of the changes he made in his instructional strategy and course assessment methods, and reveals how he has refined his teaching philosophy.

Case Authors : Swee Liang Tan, Michael Netzley, Sarita Mathur

Topic : Organizational Development

Related Areas : Education

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Calculating Net Present Value (NPV) at 6% for Guns and Roses (B): Educating Educators through Peer Coaching Programmes Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10017852)	-10017852	-	-
Year 1	3471469	-6546383	3471469	0.9434	3274971
Year 2	3972534	-2573849	7444003	0.89	3535541
Year 3	3961211	1387362	11405214	0.8396	3325909
Year 4	3248505	4635867	14653719	0.7921	2573120
TOTAL			14653719		12709541

The Net Present Value at 6% discount rate is 2691689

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. Net Present Value
2. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Coaching Peer 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 Coaching Peer 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 Guns and Roses (B): Educating Educators through Peer Coaching Programmes

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 Coaching Peer 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 Coaching Peer 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	(10017852)	-10017852	-	-
Year 1	3471469	-6546383	3471469	0.8696	3018669
Year 2	3972534	-2573849	7444003	0.7561	3003806
Year 3	3961211	1387362	11405214	0.6575	2604561
Year 4	3248505	4635867	14653719	0.5718	1857343
TOTAL					10484379

The Net NPV after 4 years is 466527

(10484379 - 10017852 )

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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	(10017852)	-10017852	-	-
Year 1	3471469	-6546383	3471469	0.8333	2892891
Year 2	3972534	-2573849	7444003	0.6944	2758704
Year 3	3961211	1387362	11405214	0.5787	2292367
Year 4	3248505	4635867	14653719	0.4823	1566602
TOTAL					9510564

The Net NPV after 4 years is -507288

At 20% discount rate the NPV is negative (9510564 - 10017852 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Coaching Peer 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 Coaching Peer has a NPV value higher than Zero then finance managers at Coaching Peer 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 Coaching Peer, then the stock price of the Coaching Peer 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 Coaching Peer 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 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.

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 Guns and Roses (B): Educating Educators through Peer Coaching Programmes

References & Further Readings

Swee Liang Tan, Michael Netzley, Sarita Mathur (2018), "Guns and Roses (B): Educating Educators through Peer Coaching Programmes Harvard Business Review Case Study. Published by HBR Publications.