Evaluating Holacracy at iQmetrix 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 Evaluating Holacracy at iQmetrix case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Evaluating Holacracy at iQmetrix case study is a Harvard Business School (HBR) case study written by Chris Street, Ann C. Frost, Clayton Caswell. The Evaluating Holacracy at iQmetrix (referred as “Holacracy Iqmetrix” 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 structure.

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 Evaluating Holacracy at iQmetrix Case Study

In late 2017, the leader of the implementation circle at iQmetrix, a software firm based in Vancouver, Canada, was reviewing her company's progress with Holacracy. This radical new organizational design was centred on employee self-management and based on a philosophy that focused "on roles (accountabilities for work), not souls (people)." All parts of the organization were now arranged in circles, which were the basic building blocks of the Holacratic organizational design, and all employees had completed their initial training and were now meeting in circles to fulfil the work of the organization. But was it enough? Could iQmetrix truly consider that it was now fully Holacratized? Nearly one year after the launch of Holacracy, the implementation leader looked back over the past year and assessed whether the implementation of Holacracy was now complete, whether the process had been a success, and what to do next.

Case Authors : Chris Street, Ann C. Frost, Clayton Caswell

Topic : Organizational Development

Related Areas : Organizational structure

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Calculating Net Present Value (NPV) at 6% for Evaluating Holacracy at iQmetrix Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020273)	-10020273	-	-
Year 1	3447119	-6573154	3447119	0.9434	3251999
Year 2	3956008	-2617146	7403127	0.89	3520833
Year 3	3948625	1331479	11351752	0.8396	3315342
Year 4	3224813	4556292	14576565	0.7921	2554354
TOTAL			14576565		12642528

The Net Present Value at 6% discount rate is 2622255

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. Internal Rate of Return
2. Net Present Value
3. Payback Period
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. Holacracy Iqmetrix 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 Holacracy Iqmetrix 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 Evaluating Holacracy at iQmetrix

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 Holacracy Iqmetrix 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 Holacracy Iqmetrix 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	(10020273)	-10020273	-	-
Year 1	3447119	-6573154	3447119	0.8696	2997495
Year 2	3956008	-2617146	7403127	0.7561	2991310
Year 3	3948625	1331479	11351752	0.6575	2596285
Year 4	3224813	4556292	14576565	0.5718	1843797
TOTAL					10428888

The Net NPV after 4 years is 408615

(10428888 - 10020273 )

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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	(10020273)	-10020273	-	-
Year 1	3447119	-6573154	3447119	0.8333	2872599
Year 2	3956008	-2617146	7403127	0.6944	2747228
Year 3	3948625	1331479	11351752	0.5787	2285084
Year 4	3224813	4556292	14576565	0.4823	1555176
TOTAL					9460087

The Net NPV after 4 years is -560186

At 20% discount rate the NPV is negative (9460087 - 10020273 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Holacracy Iqmetrix 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 Holacracy Iqmetrix has a NPV value higher than Zero then finance managers at Holacracy Iqmetrix 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 Holacracy Iqmetrix, then the stock price of the Holacracy Iqmetrix 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 Holacracy Iqmetrix 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 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.

Understanding of risks involved in the project.

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 Evaluating Holacracy at iQmetrix

References & Further Readings

Chris Street, Ann C. Frost, Clayton Caswell (2018), "Evaluating Holacracy at iQmetrix Harvard Business Review Case Study. Published by HBR Publications.