Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap? 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 Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap? case study is a Harvard Business School (HBR) case study written by Derek Man, Zeba Khan. The Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap? (referred as “Gen Ys” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Generational issues, Government, Human resource management, Innovation, Operations management, Strategic planning.

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 Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap? Case Study

The case examines two major transitions currently taking place in Hong Kong-the transformation into a knowledge-based economy (KBE) and the replacement of the Gen Xers by the Gen Ys in the workplace. It sheds light on the skills that workers require and the strategies that government and industries should adopt to suitably develop a KBE. In doing so, the case elaborates on the policy initiatives Hong Kong has undertaken to create the desired human capital and to leverage innovation and technology across knowledge-based industries. It tabulates the key statistics and trends that enable manpower planning and projections. While the case presents issues arising in the workplace due to intergenerational differences between Gen X and Gen Y, it questions how Gen Ys can effectively replace the retiring baby boomers and aging Gen X workers. It aims to arouse the attention of human resource (HR) managers in coming up with the appropriate strategies to incorporate and motivate the Gen Ys to fill the gap. In the end, can both transitions be successful and sustained? Can the new generation help transform Hong Kong into a KBE?

Case Authors : Derek Man, Zeba Khan

Topic : Organizational Development

Related Areas : Generational issues, Government, Human resource management, Innovation, Operations management, Strategic planning

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Calculating Net Present Value (NPV) at 6% for Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10004841)	-10004841	-	-
Year 1	3460577	-6544264	3460577	0.9434	3264695
Year 2	3959673	-2584591	7420250	0.89	3524095
Year 3	3944834	1360243	11365084	0.8396	3312159
Year 4	3232502	4592745	14597586	0.7921	2560444
TOTAL			14597586		12661393

The Net Present Value at 6% discount rate is 2656552

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. Net Present Value
3. Payback Period
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. Timing of the expected cash flows – stockholders of Gen Ys 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. Gen Ys 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 Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap?

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 Organizational Development 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 Gen Ys 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 Gen Ys 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	(10004841)	-10004841	-	-
Year 1	3460577	-6544264	3460577	0.8696	3009197
Year 2	3959673	-2584591	7420250	0.7561	2994082
Year 3	3944834	1360243	11365084	0.6575	2593792
Year 4	3232502	4592745	14597586	0.5718	1848194
TOTAL					10445265

The Net NPV after 4 years is 440424

(10445265 - 10004841 )

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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	(10004841)	-10004841	-	-
Year 1	3460577	-6544264	3460577	0.8333	2883814
Year 2	3959673	-2584591	7420250	0.6944	2749773
Year 3	3944834	1360243	11365084	0.5787	2282890
Year 4	3232502	4592745	14597586	0.4823	1558884
TOTAL					9475361

The Net NPV after 4 years is -529480

At 20% discount rate the NPV is negative (9475361 - 10004841 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Gen Ys 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 Gen Ys has a NPV value higher than Zero then finance managers at Gen Ys 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 Gen Ys, then the stock price of the Gen Ys 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 Gen Ys 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.

Understanding of risks involved in 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.

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.

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 Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap?

References & Further Readings

Derek Man, Zeba Khan (2018), "Assessing Hong Kong's Human Resources in Its Transition to a Knowledge-Based Economy: Can Gen Ys Fill the Gap? Harvard Business Review Case Study. Published by HBR Publications.