What to Expect from Agile 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 What to Expect from Agile case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. What to Expect from Agile case study is a Harvard Business School (HBR) case study written by Julian Birkinshaw. The What to Expect from Agile (referred as “Agile Ing” 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, .

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 What to Expect from Agile Case Study

This is an MIT Sloan Management Review article. In this article, the author examines agile as a management practice through a case study of ING bank in the Netherlands, which has adopted agile across its headquarters in Amsterdam. The research is based on in-depth interviews with 15 ING executives and many front-line employees. The article highlights key learnings at ING, largely from the point of view of the senior executives of the bank, and explores the challenges of implementing agile in an established organization, focusing on five lessons: 1. Decide how much power you are willing to give up. Agile shifts power away from those at the top and puts ownership in the hands of those closest to the action. Unless top executives are willing to accept that they are surrendering some status and power, agile will not be a good fit. 2. Prepare stakeholders for the leap. ING executives had to sell agile to nervous stakeholders, including board members, employees, and bank regulators. For example, executives assured regulators that finance, compliance, and legal functions would continue to be managed in the traditional way. 3. Build the structure around customers -and keep it fluid. Like other approaches to management, agile is focused on customers. ING in the Netherlands has tried to keep its organizational structure fluid so that it can evolve to do what's best for customers. 4. Give employees the right balance of oversight and autonomy. A quarterly goal-setting process is part of the agile structure at ING in the Netherlands. This has been a learning process. Initially, groups defined goals that were comfortably achievable, and executives had to urge them toward more ambitious targets. 5. Provide employees with development and growth opportunities. The team-based structures used in agile can be scary for employees used to having their personal development and career progression mapped out by HR departments or the mainstream career trajectories of a given industry. One lesson from ING's experience is that finding proper coaching and support for agile -and the new, long-term responsibilities employees must embrace -is one of the hardest parts of the transformation.

Case Authors : Julian Birkinshaw

Topic : Leadership & Managing People

Related Areas :

---

Calculating Net Present Value (NPV) at 6% for What to Expect from Agile Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10003002)	-10003002	-	-
Year 1	3472485	-6530517	3472485	0.9434	3275929
Year 2	3969448	-2561069	7441933	0.89	3532795
Year 3	3958337	1397268	11400270	0.8396	3323496
Year 4	3226642	4623910	14626912	0.7921	2555803
TOTAL			14626912		12688023

The Net Present Value at 6% discount rate is 2685021

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. Internal Rate of Return
2. Profitability Index
3. Net Present Value
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. Agile Ing 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 Agile Ing 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 What to Expect from Agile

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 Agile Ing 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 Agile Ing 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	(10003002)	-10003002	-	-
Year 1	3472485	-6530517	3472485	0.8696	3019552
Year 2	3969448	-2561069	7441933	0.7561	3001473
Year 3	3958337	1397268	11400270	0.6575	2602671
Year 4	3226642	4623910	14626912	0.5718	1844843
TOTAL					10468539

The Net NPV after 4 years is 465537

(10468539 - 10003002 )

---

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	(10003002)	-10003002	-	-
Year 1	3472485	-6530517	3472485	0.8333	2893738
Year 2	3969448	-2561069	7441933	0.6944	2756561
Year 3	3958337	1397268	11400270	0.5787	2290704
Year 4	3226642	4623910	14626912	0.4823	1556058
TOTAL					9497061

The Net NPV after 4 years is -505941

At 20% discount rate the NPV is negative (9497061 - 10003002 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Agile Ing 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 Agile Ing has a NPV value higher than Zero then finance managers at Agile Ing 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 Agile Ing, then the stock price of the Agile Ing 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 Agile Ing 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 can impact the cash flow of the project.

Understanding of risks involved in the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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

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 What to Expect from Agile

References & Further Readings

Julian Birkinshaw (2018), "What to Expect from Agile Harvard Business Review Case Study. Published by HBR Publications.