Managing Millennials' Personal Use of Technology at Work 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 Millennials' Personal Use of Technology at Work case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Managing Millennials' Personal Use of Technology at Work case study is a Harvard Business School (HBR) case study written by Sungdoo Kim. The Managing Millennials' Personal Use of Technology at Work (referred as “Millennials Gen” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Internet, IT.

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 Managing Millennials' Personal Use of Technology at Work Case Study

Growing up with the internet and unparalleled access to technology, millennials (individuals born during 1981-1995, also known as Gen Y and Gen Me) extensively use various technologies for non-work-related reasons while at work. Both popular media and scholarly research have portrayed this issue negatively and have supported monitoring and restricting personal use of technology. However, if organizations are to attract and retain millennials-now the largest generation in the U.S. workforce-it is crucial to understand their characteristics and what drives them. Drawing on research on generational differences, organizational control, and cyberloafing, this article explains how unique characteristics of millennials lead them to engage in personal use of technology at work and how organizations might address this issue. Specifically, I contrast two one-sided approaches (deterrence and laissez-faire) that can lead to dysfunctional outcomes when used in excess and recommend more viable solutions. These solutions include establishing a workplace technology use policy based on shared understanding, fostering both relaxation and urgency mentalities, and training both millennials and their managers.

Case Authors : Sungdoo Kim

Topic : Technology & Operations

Related Areas : Internet, IT

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Calculating Net Present Value (NPV) at 6% for Managing Millennials' Personal Use of Technology at Work Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014374)	-10014374	-	-
Year 1	3449423	-6564951	3449423	0.9434	3254173
Year 2	3968685	-2596266	7418108	0.89	3532116
Year 3	3967346	1371080	11385454	0.8396	3331060
Year 4	3222339	4593419	14607793	0.7921	2552394
TOTAL			14607793		12669743

The Net Present Value at 6% discount rate is 2655369

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. Profitability Index
3. Payback Period
4. Net Present Value

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. Millennials Gen 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 Millennials Gen 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 Managing Millennials' Personal Use of Technology at Work

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 Technology & Operations 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 Millennials Gen 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 Millennials Gen 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	(10014374)	-10014374	-	-
Year 1	3449423	-6564951	3449423	0.8696	2999498
Year 2	3968685	-2596266	7418108	0.7561	3000896
Year 3	3967346	1371080	11385454	0.6575	2608594
Year 4	3222339	4593419	14607793	0.5718	1842383
TOTAL					10451371

The Net NPV after 4 years is 436997

(10451371 - 10014374 )

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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	(10014374)	-10014374	-	-
Year 1	3449423	-6564951	3449423	0.8333	2874519
Year 2	3968685	-2596266	7418108	0.6944	2756031
Year 3	3967346	1371080	11385454	0.5787	2295918
Year 4	3222339	4593419	14607793	0.4823	1553983
TOTAL					9480451

The Net NPV after 4 years is -533923

At 20% discount rate the NPV is negative (9480451 - 10014374 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Millennials Gen 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 Millennials Gen has a NPV value higher than Zero then finance managers at Millennials Gen 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 Millennials Gen, then the stock price of the Millennials Gen 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 Millennials Gen 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 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 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.

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 Managing Millennials' Personal Use of Technology at Work

References & Further Readings

Sungdoo Kim (2018), "Managing Millennials' Personal Use of Technology at Work Harvard Business Review Case Study. Published by HBR Publications.