Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked 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 Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked case study is a Harvard Business School (HBR) case study written by Howard Thomas, Lipika Bhattacharya. The Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked (referred as “Juntos Banked” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Economy, Financial 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 Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked Case Study

The case is set in March 2018. Neha Bhatia Ramdas, Director of Sales at Juntos Global, is visiting a prospective partner bank of her company in Singapore, which wants to expand its outreach amongst the unbanked population in South East Asia. The partner bank is not comfortable in sharing their customer data with Juntos, and Ramdas has been entrusted with the difficult task of convincing the partner bank to share their data with Juntos. Juntos specialises in deploying SMS based solutions powered by data analytics capabilities for financial service providers to help them serve their newly banked customers more efficiently. The Juntos SMS based platform helps the newly banked customers to build formal savings habits through behavioural science strategies by building a relationship of 'trust' with their customers. By creating trusting relationships between financial service providers and their customers based on the principles of Human Centred Design (HCD), Juntos was able to generate measurable increases in account usage in many of its projects. The Juntos business model was a partnership model, wherein the partner financial service was equally involved in the implementation of the Juntos solution, especially at the beginning of the project. Juntos used an agile implementation process for project implementation that was preceded by a useful ethnographic study that allowed Juntos to customise their solution for their partner clients. Juntos typically implemented pilot projets with their partners, before implementing large-scale projects. The flipside of this arrangement was the long sales cycle that was the primary impediment to Juntos success.

Case Authors : Howard Thomas, Lipika Bhattacharya

Topic : Finance & Accounting

Related Areas : Economy, Financial management

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Calculating Net Present Value (NPV) at 6% for Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10026701)	-10026701	-	-
Year 1	3456274	-6570427	3456274	0.9434	3260636
Year 2	3978242	-2592185	7434516	0.89	3540621
Year 3	3947805	1355620	11382321	0.8396	3314653
Year 4	3227787	4583407	14610108	0.7921	2556710
TOTAL			14610108		12672620

The Net Present Value at 6% discount rate is 2645919

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. Payback Period
3. Net Present Value
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. Timing of the expected cash flows – stockholders of Juntos Banked 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. Juntos Banked 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 Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked

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 Finance & Accounting 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 Juntos Banked 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 Juntos Banked 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	(10026701)	-10026701	-	-
Year 1	3456274	-6570427	3456274	0.8696	3005456
Year 2	3978242	-2592185	7434516	0.7561	3008122
Year 3	3947805	1355620	11382321	0.6575	2595746
Year 4	3227787	4583407	14610108	0.5718	1845498
TOTAL					10454822

The Net NPV after 4 years is 428121

(10454822 - 10026701 )

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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	(10026701)	-10026701	-	-
Year 1	3456274	-6570427	3456274	0.8333	2880228
Year 2	3978242	-2592185	7434516	0.6944	2762668
Year 3	3947805	1355620	11382321	0.5787	2284609
Year 4	3227787	4583407	14610108	0.4823	1556610
TOTAL					9484116

The Net NPV after 4 years is -542585

At 20% discount rate the NPV is negative (9484116 - 10026701 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Juntos Banked 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 Juntos Banked has a NPV value higher than Zero then finance managers at Juntos Banked 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 Juntos Banked, then the stock price of the Juntos Banked 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 Juntos Banked 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 will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What can impact the cash flow of 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 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.

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 Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked

References & Further Readings

Howard Thomas, Lipika Bhattacharya (2018), "Juntos Global: Deploying Human Centered Design to Motivate the Newly Banked Harvard Business Review Case Study. Published by HBR Publications.