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Redefining Work: Three Forces That Are Reshaping 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 Redefining Work: Three Forces That Are Reshaping Jobs case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Redefining Work: Three Forces That Are Reshaping Jobs case study is a Harvard Business School (HBR) case study written by John Hagel, Jeff Schwartz, Josh Bersin. The Redefining Work: Three Forces That Are Reshaping Jobs (referred as “Describe Forces” from here on) case study provides evaluation & decision scenario in field of Organizational Development. 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




Case Description of Redefining Work: Three Forces That Are Reshaping Jobs Case Study


The authors argue that three forces are creating a profound shift in the very nature of work: technology, demographics and the power of pull-which has made customers in every industry more powerful than ever before. After discussing each force in detail, they describe how technology will reshape every job and how alternative work arrangements will continue to grow. They then describe the key implications of all of this for individuals (including 'engage in lifelong learning'), organizations (including 'implement new models of culture and rewards') and public policy (including 'transition support for income and healthcare'). Their hope is that their framework will help people proactively navigate the future of work and come together to make the transition as productive and smooth as possible.


Case Authors : John Hagel, Jeff Schwartz, Josh Bersin

Topic : Organizational Development

Related Areas :




Calculating Net Present Value (NPV) at 6% for Redefining Work: Three Forces That Are Reshaping Jobs Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10015721) -10015721 - -
Year 1 3467553 -6548168 3467553 0.9434 3271276
Year 2 3979473 -2568695 7447026 0.89 3541717
Year 3 3945234 1376539 11392260 0.8396 3312495
Year 4 3236032 4612571 14628292 0.7921 2563240
TOTAL 14628292 12688728


The Net Present Value at 6% discount rate is 2673007

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.




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. Net Present Value
3. Payback Period
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 Describe Forces 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. Describe Forces shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.




Formula and Steps to Calculate Net Present Value (NPV) of Redefining Work: Three Forces That Are Reshaping 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 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 Describe Forces 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 Describe Forces 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 (10015721) -10015721 - -
Year 1 3467553 -6548168 3467553 0.8696 3015263
Year 2 3979473 -2568695 7447026 0.7561 3009053
Year 3 3945234 1376539 11392260 0.6575 2594055
Year 4 3236032 4612571 14628292 0.5718 1850212
TOTAL 10468584


The Net NPV after 4 years is 452863

(10468584 - 10015721 )






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 (10015721) -10015721 - -
Year 1 3467553 -6548168 3467553 0.8333 2889628
Year 2 3979473 -2568695 7447026 0.6944 2763523
Year 3 3945234 1376539 11392260 0.5787 2283122
Year 4 3236032 4612571 14628292 0.4823 1560586
TOTAL 9496858


The Net NPV after 4 years is -518863

At 20% discount rate the NPV is negative (9496858 - 10015721 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Describe Forces 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 Describe Forces has a NPV value higher than Zero then finance managers at Describe Forces 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 Describe Forces, then the stock price of the Describe Forces 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 Describe Forces 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.




References & Further Readings

John Hagel, Jeff Schwartz, Josh Bersin (2018), "Redefining Work: Three Forces That Are Reshaping Jobs Harvard Business Review Case Study. Published by HBR Publications.