Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads 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 Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads case study is a Harvard Business School (HBR) case study written by Pamela Varley, Christian Seelos. The Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads (referred as “Sekem Abouleish” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Social enterprise.

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 Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads Case Study

The SEKEM initiative, headquartered in Cairo, Egypt, was an unusual social enterprise by any standard. It produced organic products; provided health, education and arts programs to the local community; and-more broadly, sought to create a sustainable community that explicitly cultivated the human potential of its members. It reflected the vision of its charismatic founding director, Ibrahim Abouleish, who had run SEKEM with his son, Helmy Abouleish for more than 30 years. In 2017, SEKEM marked its 40th anniversary-a time for celebration, and also of transition for the initiative. Some of its challenges were typical of any organization at midlife. But for SEKEM, these were coupled with the loss of SEKEM's passionate leader, Ibrahim Abouleish, who died in the summer of 2017. In addition, SEKEM faced the challenges of operating in a country that had, in rapid succession, experienced a revolution, military coup, and economic collapse. The case details the history and evolution of this unusual social enterprise and tells of the dilemmas facing Helmy Abouleish and his leadership team at this critical juncture. Case number 2126.0

Case Authors : Pamela Varley, Christian Seelos

Topic : Global Business

Related Areas : Social enterprise

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Calculating Net Present Value (NPV) at 6% for Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10017868)	-10017868	-	-
Year 1	3446776	-6571092	3446776	0.9434	3251675
Year 2	3954499	-2616593	7401275	0.89	3519490
Year 3	3957656	1341063	11358931	0.8396	3322924
Year 4	3226094	4567157	14585025	0.7921	2555369
TOTAL			14585025		12649458

The Net Present Value at 6% discount rate is 2631590

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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Sekem Abouleish 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 Sekem Abouleish 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 Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads

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 Global Business 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 Sekem Abouleish 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 Sekem Abouleish 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	(10017868)	-10017868	-	-
Year 1	3446776	-6571092	3446776	0.8696	2997197
Year 2	3954499	-2616593	7401275	0.7561	2990169
Year 3	3957656	1341063	11358931	0.6575	2602223
Year 4	3226094	4567157	14585025	0.5718	1844530
TOTAL					10434119

The Net NPV after 4 years is 416251

(10434119 - 10017868 )

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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	(10017868)	-10017868	-	-
Year 1	3446776	-6571092	3446776	0.8333	2872313
Year 2	3954499	-2616593	7401275	0.6944	2746180
Year 3	3957656	1341063	11358931	0.5787	2290310
Year 4	3226094	4567157	14585025	0.4823	1555794
TOTAL					9464597

The Net NPV after 4 years is -553271

At 20% discount rate the NPV is negative (9464597 - 10017868 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Sekem Abouleish 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 Sekem Abouleish has a NPV value higher than Zero then finance managers at Sekem Abouleish 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 Sekem Abouleish, then the stock price of the Sekem Abouleish 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 Sekem Abouleish 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 key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Understanding of risks involved in the project.

What will be a multi year spillover effect of various taxation regulations.

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 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 Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads

References & Further Readings

Pamela Varley, Christian Seelos (2018), "Transforming Desert Land & Human Potential: Egypt's 'SEKEM' Initiative Reaches a Crossroads Harvard Business Review Case Study. Published by HBR Publications.