×




Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop 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 Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop case study is a Harvard Business School (HBR) case study written by Derek C.M. van Bever. The Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop (referred as “Religion Religious” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Ethics, IT, Operations management.

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 Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop Case Study


Challenges related to managing religion in the workplace are on the rise, as are religious discrimination claims and monetary settlements, in the United States and around the world. This case examines two incidents of alleged religious discrimination that made their way to the US Supreme Court, allowing students to explore the limits on the degree to which business owners and leaders can express their values through their companies' operations and the extent to which companies should provide reasonable accommodation for employee faith practices.


Case Authors : Derek C.M. van Bever

Topic : Leadership & Managing People

Related Areas : Ethics, IT, Operations management




Calculating Net Present Value (NPV) at 6% for Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10024691) -10024691 - -
Year 1 3452759 -6571932 3452759 0.9434 3257320
Year 2 3966652 -2605280 7419411 0.89 3530306
Year 3 3938877 1333597 11358288 0.8396 3307157
Year 4 3239445 4573042 14597733 0.7921 2565944
TOTAL 14597733 12660727




The Net Present Value at 6% discount rate is 2636036

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. Payback Period
2. Net Present Value
3. Profitability Index
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. Religion Religious 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 Religion Religious have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop

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 Leadership & Managing People 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 Religion Religious 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 Religion Religious 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 (10024691) -10024691 - -
Year 1 3452759 -6571932 3452759 0.8696 3002399
Year 2 3966652 -2605280 7419411 0.7561 2999359
Year 3 3938877 1333597 11358288 0.6575 2589876
Year 4 3239445 4573042 14597733 0.5718 1852163
TOTAL 10443797


The Net NPV after 4 years is 419106

(10443797 - 10024691 )








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 (10024691) -10024691 - -
Year 1 3452759 -6571932 3452759 0.8333 2877299
Year 2 3966652 -2605280 7419411 0.6944 2754619
Year 3 3938877 1333597 11358288 0.5787 2279443
Year 4 3239445 4573042 14597733 0.4823 1562232
TOTAL 9473594


The Net NPV after 4 years is -551097

At 20% discount rate the NPV is negative (9473594 - 10024691 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Religion Religious 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 Religion Religious has a NPV value higher than Zero then finance managers at Religion Religious 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 Religion Religious, then the stock price of the Religion Religious 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 Religion Religious 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 –

Understanding of risks involved in 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.

What can impact the cash flow of 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.

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.






Negotiation Strategy of Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop

References & Further Readings

Derek C.M. van Bever (2018), "Managing Religion in the Workplace: Abercrombie & Fitch and Masterpiece Cakeshop Harvard Business Review Case Study. Published by HBR Publications.


Hengda Hi Tech A SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


China Telecom SWOT Analysis / TOWS Matrix

Services , Communications Services


Fusion Pharm Inc SWOT Analysis / TOWS Matrix

Financial , Consumer Financial Services


Yinson SWOT Analysis / TOWS Matrix

Capital Goods , Construction - Raw Materials


TerraForm Power SWOT Analysis / TOWS Matrix

Utilities , Electric Utilities


Hitachi High-Technologies Corp SWOT Analysis / TOWS Matrix

Technology , Electronic Instr. & Controls


Org Packaging A SWOT Analysis / TOWS Matrix

Technology , Software & Programming


Gulf Resources SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing