Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability 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 Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability case study is a Harvard Business School (HBR) case study written by Joseph El-Khoury, Anna Kim. The Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability (referred as “Gwb Gardens” 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, Social enterprise, Social responsibility, Sustainability.

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 Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability Case Study

The case examines a social enterprise that is at a turning point in its development. After a successful start-up phase, Gardens Without Borders (GWB) aspires to achieve long-term financial viability. The case describes various projects carried out by GWB to promote sustainable agriculture around the world before addressing the challenge it now faces: achieving financial sustainability by collaborating with the private sector. Specifically, GWB wishes to develop customizable proposals for partnerships with two corporations known for their commitment to corporate social responsibility. By studying this case, students are expected to gain an in-depth understanding of real-life challenges faced by social enterprise start-ups and develop strategic decision-making capabilities for creating corporate-social enterprise collaborations for sustainability.

Case Authors : Joseph El-Khoury, Anna Kim

Topic : Leadership & Managing People

Related Areas : Ethics, Social enterprise, Social responsibility, Sustainability

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Calculating Net Present Value (NPV) at 6% for Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020030)	-10020030	-	-
Year 1	3461202	-6558828	3461202	0.9434	3265285
Year 2	3959911	-2598917	7421113	0.89	3524307
Year 3	3944899	1345982	11366012	0.8396	3312213
Year 4	3251738	4597720	14617750	0.7921	2575681
TOTAL			14617750		12677486

The Net Present Value at 6% discount rate is 2657456

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. Net Present Value
2. Internal Rate of Return
3. Payback Period
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. Gwb Gardens 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 Gwb Gardens 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 Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability

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 Gwb Gardens 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 Gwb Gardens 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	(10020030)	-10020030	-	-
Year 1	3461202	-6558828	3461202	0.8696	3009741
Year 2	3959911	-2598917	7421113	0.7561	2994262
Year 3	3944899	1345982	11366012	0.6575	2593835
Year 4	3251738	4597720	14617750	0.5718	1859192
TOTAL					10457029

The Net NPV after 4 years is 436999

(10457029 - 10020030 )

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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	(10020030)	-10020030	-	-
Year 1	3461202	-6558828	3461202	0.8333	2884335
Year 2	3959911	-2598917	7421113	0.6944	2749938
Year 3	3944899	1345982	11366012	0.5787	2282928
Year 4	3251738	4597720	14617750	0.4823	1568161
TOTAL					9485362

The Net NPV after 4 years is -534668

At 20% discount rate the NPV is negative (9485362 - 10020030 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Gwb Gardens 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 Gwb Gardens has a NPV value higher than Zero then finance managers at Gwb Gardens 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 Gwb Gardens, then the stock price of the Gwb Gardens 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 Gwb Gardens 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.

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.

Understanding of risks involved in the project.

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

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 Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability

References & Further Readings

Joseph El-Khoury, Anna Kim (2018), "Gardens Without Borders: Creating Corporate-Social Enterprise Collaborations for Sustainability Harvard Business Review Case Study. Published by HBR Publications.