New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002 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 New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002 case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002 case study is a Harvard Business School (HBR) case study written by Pamela Varley, Arne Westad. The New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002 (referred as “Iraq War” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Government, Leadership.

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 New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002 Case Study

The U.S. choice to go to war with Iraq, beginning in March 2003, was enormously consequential. This two-part case, developed for an HKS course called "Power Shifts: Understanding Global Change Through History," goes back in time to trace the evolution of American policy toward Iraq prior to 9/11, and the shift in thinking that led to war with Iraq during the administration of George W. Bush. The two parts of the case cover different parts of the chronology. While each could be used on its own, they are intended for use together. The (A) case, subtitled "The United States & Iraq, 1980 to 2002," briefly summarizes US policy toward Iraq after World War II, in the context of the Iran-Iraq War, and during the Persian Gulf War. It describes the frustrations inherent in the "aggressive containment" approach in the decade following. The case describes Bush Administration thinking about Iraq before 9/11, and the shift in thinking after that attack, including tensions within the Administration. The case ends in September 2002, with a tense battle between Vice President Dick Cheney and Secretary of State Colin Powell over what President Bush should say about Iraq in his upcoming September 12 address to the United Nations. The (B) case, subtitled "The Road to War, September 2002 to March 2003," begins with the President's address to the UN, and continues with the Administration's efforts to persuade the U.S. Congress and the United Nations that Iraq was manufacturing WMD, the simultaneous pursuit of a diplomacy track while preparing for war, and negotiations with a critical U.S. ally, British Prime Minister Tony Blair. The case ends with President George W. Bush's ultimatum to Saddam Hussein-that he and his sons leave Iraq within 48 hours, or face war with the United States. Case number 2130.0

Case Authors : Pamela Varley, Arne Westad

Topic : Global Business

Related Areas : Government, Leadership

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Calculating Net Present Value (NPV) at 6% for New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002 Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016247)	-10016247	-	-
Year 1	3457039	-6559208	3457039	0.9434	3261358
Year 2	3966265	-2592943	7423304	0.89	3529962
Year 3	3951236	1358293	11374540	0.8396	3317534
Year 4	3229314	4587607	14603854	0.7921	2557919
TOTAL			14603854		12666772

The Net Present Value at 6% discount rate is 2650525

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. Net Present Value
3. Internal Rate of Return
4. Payback Period

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 Iraq War 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. Iraq War 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 New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002

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 Iraq War 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 Iraq War 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	(10016247)	-10016247	-	-
Year 1	3457039	-6559208	3457039	0.8696	3006121
Year 2	3966265	-2592943	7423304	0.7561	2999066
Year 3	3951236	1358293	11374540	0.6575	2598002
Year 4	3229314	4587607	14603854	0.5718	1846371
TOTAL					10449560

The Net NPV after 4 years is 433313

(10449560 - 10016247 )

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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	(10016247)	-10016247	-	-
Year 1	3457039	-6559208	3457039	0.8333	2880866
Year 2	3966265	-2592943	7423304	0.6944	2754351
Year 3	3951236	1358293	11374540	0.5787	2286595
Year 4	3229314	4587607	14603854	0.4823	1557347
TOTAL					9479158

The Net NPV after 4 years is -537089

At 20% discount rate the NPV is negative (9479158 - 10016247 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Iraq War 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 Iraq War has a NPV value higher than Zero then finance managers at Iraq War 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 Iraq War, then the stock price of the Iraq War 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 Iraq War 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.

What can impact the cash flow of the project.

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.

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 New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002

References & Further Readings

Pamela Varley, Arne Westad (2018), "New Peril, Old Adversary: George W. Bush, 9/11, & Iraq (A): The United States & Iraq, 1980 to 2002 Harvard Business Review Case Study. Published by HBR Publications.