Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S. 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 Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S. case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S. case study is a Harvard Business School (HBR) case study written by William J. Heisler, Diane Bandow. The Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S. (referred as “Workers Shortages” from here on) case study provides evaluation & decision scenario in field of Communication. It also touches upon business topics such as - Value proposition, Developing employees, Employee retention, Human resource management, Innovation, Motivating people.

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 Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S. Case Study

Over the next 20 years, many organizations will experience significant shortages of skilled workers. At the same time, because of longer lifespans and a gradual rise in what society has considered the traditional retirement age of 65, older workers will represent a growing proportion of the American workforce. For a variety of reasons, many of these older workers desire to continue working and, if retained and engaged, they constitute a significant labor source for mitigating the emerging shortages of skilled workers. However, many organizations are not prepared to take advantage of this demographic shift; some even generate barriers that impede the retention and engagement of older workers. In this article, we identify a variety of ways in which organizations can retain and engage older workers to meet their staffing needs and enhance organizational performance. We also discuss the relationship of these proposals to prominent theories of motivation in management.

Case Authors : William J. Heisler, Diane Bandow

Topic : Communication

Related Areas : Developing employees, Employee retention, Human resource management, Innovation, Motivating people

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Calculating Net Present Value (NPV) at 6% for Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S. Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10015480)	-10015480	-	-
Year 1	3456411	-6559069	3456411	0.9434	3260765
Year 2	3959186	-2599883	7415597	0.89	3523661
Year 3	3945262	1345379	11360859	0.8396	3312518
Year 4	3249414	4594793	14610273	0.7921	2573840
TOTAL			14610273		12670785

The Net Present Value at 6% discount rate is 2655305

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. Payback Period
3. Net Present Value
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Workers Shortages 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 Workers Shortages 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 Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S.

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 Communication 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 Workers Shortages 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 Workers Shortages 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	(10015480)	-10015480	-	-
Year 1	3456411	-6559069	3456411	0.8696	3005575
Year 2	3959186	-2599883	7415597	0.7561	2993713
Year 3	3945262	1345379	11360859	0.6575	2594074
Year 4	3249414	4594793	14610273	0.5718	1857863
TOTAL					10451225

The Net NPV after 4 years is 435745

(10451225 - 10015480 )

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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	(10015480)	-10015480	-	-
Year 1	3456411	-6559069	3456411	0.8333	2880343
Year 2	3959186	-2599883	7415597	0.6944	2749435
Year 3	3945262	1345379	11360859	0.5787	2283138
Year 4	3249414	4594793	14610273	0.4823	1567040
TOTAL					9479955

The Net NPV after 4 years is -535525

At 20% discount rate the NPV is negative (9479955 - 10015480 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Workers Shortages 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 Workers Shortages has a NPV value higher than Zero then finance managers at Workers Shortages 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 Workers Shortages, then the stock price of the Workers Shortages 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 Workers Shortages 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 can impact the cash flow of the project.

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

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.

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 Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S.

References & Further Readings

William J. Heisler, Diane Bandow (2018), "Retaining and Engaging Older Workers: A Solution to Worker Shortages in the U.S. Harvard Business Review Case Study. Published by HBR Publications.