Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement 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 Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement case study is a Harvard Business School (HBR) case study written by Pamela Varley, Robert Wilkinson. The Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement (referred as “Forest Brana” from here on) case study provides evaluation & decision scenario in field of Communication. It also touches upon business topics such as - Value proposition, Joint ventures, Leadership, Negotiations.

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 Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement Case Study

In the lead-up to the United Nations' 2015 climate summit in Paris, excitement ran high and so did anxiety. Negotiators hoped for a new international agreement, the first such effort since the disappointing collapse of negotiations six years earlier in Copenhagen. But the text of the agreement was still subject to debate. This case focuses on the efforts of one mid-level participant in the process, Josefina Brana-Varela, policy director for Forests & Climate at WWF. Her focus: to try to ensure that forest protection received a specific mention in the Paris Agreement. Two years earlier, national delegates had added a set of rules and standards called the Warsaw Framework for REDD+ (Reducing Emissions from Deforestation and Forest Degradation) to the international climate regime. Under this framework, developing countries could qualify for payment in exchange for reducing deforestation or forest damage, or for introducing practices such as sustainable forest management. But participation in the program was entirely voluntary. It remained to be seen whether developed countries would provide enough funding to make it work, and whether developing countries would be willing to adopt policies to measure and reduce deforestation and forest degradation. In this context, Brana-Varela thought it crucial that the Paris Agreement send a signal that delegates viewed forest preservation not a side concern, but as an objective as critical as the reduction of greenhouse gas emissions from fossil fuels. Some negotiators were leery of doing so, however, for an array of reasons. The case provides enough background for the reader to understand the tensions over this issue, then follows Brana-Varela, a one-time forest negotiator for Mexico, in her new role at WWF. The case shows the strategic choices of a respected, but not especially powerful, figure, as she tries to influence a complex international process. Case number 2118.0

Case Authors : Pamela Varley, Robert Wilkinson

Topic : Communication

Related Areas : Joint ventures, Leadership, Negotiations

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Calculating Net Present Value (NPV) at 6% for Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10012885)	-10012885	-	-
Year 1	3449772	-6563113	3449772	0.9434	3254502
Year 2	3964850	-2598263	7414622	0.89	3528702
Year 3	3947248	1348985	11361870	0.8396	3314186
Year 4	3224048	4573033	14585918	0.7921	2553748
TOTAL			14585918		12651138

The Net Present Value at 6% discount rate is 2638253

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. Internal Rate of Return
2. Net Present Value
3. Profitability Index
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Forest Brana 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 Forest Brana 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 Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement

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 Forest Brana 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 Forest Brana 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	(10012885)	-10012885	-	-
Year 1	3449772	-6563113	3449772	0.8696	2999802
Year 2	3964850	-2598263	7414622	0.7561	2997996
Year 3	3947248	1348985	11361870	0.6575	2595380
Year 4	3224048	4573033	14585918	0.5718	1843360
TOTAL					10436537

The Net NPV after 4 years is 423652

(10436537 - 10012885 )

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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	(10012885)	-10012885	-	-
Year 1	3449772	-6563113	3449772	0.8333	2874810
Year 2	3964850	-2598263	7414622	0.6944	2753368
Year 3	3947248	1348985	11361870	0.5787	2284287
Year 4	3224048	4573033	14585918	0.4823	1554807
TOTAL					9467272

The Net NPV after 4 years is -545613

At 20% discount rate the NPV is negative (9467272 - 10012885 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Forest Brana 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 Forest Brana has a NPV value higher than Zero then finance managers at Forest Brana 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 Forest Brana, then the stock price of the Forest Brana 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 Forest Brana 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 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.

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 Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement

References & Further Readings

Pamela Varley, Robert Wilkinson (2018), "Negotiating Toward the Paris Accords: WWF & the Role of Forests in the 2015 Climate Agreement Harvard Business Review Case Study. Published by HBR Publications.