Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands 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 Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands case study is a Harvard Business School (HBR) case study written by Laura Winig, Julie Boatright Wilson. The Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands (referred as “Rotterdam Program” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Generational issues, Growth strategy, Human resource management, 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 Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands Case Study

Board Chair Nanne Boonstra was about to learn the details of a scaling strategy proposal for Mothers of Rotterdam, a fledgling social service program that helped the city's disadvantaged pregnant women. Boonstra's employer, a venture philanthropy foundation that was funding the program, was interested in whether it was feasible to scale the pilot program throughout Rotterdam. Other stakeholders hoped the program might be replicated elsewhere in the Netherlands or even within other European countries. Boonstra knew that some stakeholders were concerned about scaling too early-before research determined if the program was effective and for whom. He hoped that the consulting firm hired to design the scaling strategy would be able to answer the board's many questions about how best to move forward. How do you turn an innovative start-up program into a structured professional program without losing the passion and energy that comes from its founders? How do you go from a start-up to a more structured, formalized organization? Is the program's inventor the right person to scale the program? How long does a program need to run to determine whether it is effective? Is it necessary/advisable to scale the program in Rotterdam first, and focus on replicating the program in other cities afterwards or can this happen in parallel? Is there a risk of other cities trying to copy the program without guidance from the Rotterdam staff and "not getting it right"? The case goes on to unfold the story of Mothers of Rotterdam-an entrepreneurial social service program based in the Netherlands-from its inception through the board of directors meeting. The program's stakeholders, eager to broaden the impact of Mothers of Rotterdam grapple with how the program can best be scaled up. Of significance is the role of the organization's charismatic founder, Barend Rombout, who is credited with driving the program's successful-if unorthodox-approach to social service delivery. Case number 2128.0

Case Authors : Laura Winig, Julie Boatright Wilson

Topic : Innovation & Entrepreneurship

Related Areas : Generational issues, Growth strategy, Human resource management, Social enterprise

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Calculating Net Present Value (NPV) at 6% for Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027166)	-10027166	-	-
Year 1	3447709	-6579457	3447709	0.9434	3252556
Year 2	3964620	-2614837	7412329	0.89	3528498
Year 3	3952826	1337989	11365155	0.8396	3318869
Year 4	3233341	4571330	14598496	0.7921	2561109
TOTAL			14598496		12661031

The Net Present Value at 6% discount rate is 2633865

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. Profitability Index
3. Internal Rate of Return
4. Net Present Value

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 Rotterdam Program 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. Rotterdam Program 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 Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands

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 Innovation & Entrepreneurship 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 Rotterdam Program 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 Rotterdam Program 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	(10027166)	-10027166	-	-
Year 1	3447709	-6579457	3447709	0.8696	2998008
Year 2	3964620	-2614837	7412329	0.7561	2997822
Year 3	3952826	1337989	11365155	0.6575	2599047
Year 4	3233341	4571330	14598496	0.5718	1848673
TOTAL					10443551

The Net NPV after 4 years is 416385

(10443551 - 10027166 )

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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	(10027166)	-10027166	-	-
Year 1	3447709	-6579457	3447709	0.8333	2873091
Year 2	3964620	-2614837	7412329	0.6944	2753208
Year 3	3952826	1337989	11365155	0.5787	2287515
Year 4	3233341	4571330	14598496	0.4823	1559289
TOTAL					9473103

The Net NPV after 4 years is -554063

At 20% discount rate the NPV is negative (9473103 - 10027166 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Rotterdam Program 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 Rotterdam Program has a NPV value higher than Zero then finance managers at Rotterdam Program 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 Rotterdam Program, then the stock price of the Rotterdam Program 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 Rotterdam Program 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 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.

Understanding of risks involved in 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 Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands

References & Further Readings

Laura Winig, Julie Boatright Wilson (2018), "Mothers of Rotterdam: Scaling a Social Services Program in the Netherlands Harvard Business Review Case Study. Published by HBR Publications.