Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project 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 Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project case study is a Harvard Business School (HBR) case study written by Deborah Milstein, Susan Madden, Teresa Chahine. The Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project (referred as “Tysa Staten” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Social enterprise.

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 Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project Case Study

This case focuses on the challenges of keeping a collective impact program-the Tackling Youth Substance Abuse (TYSA) program on Staten Island-focused and effective over time, a problem faced by many collaborative community-based efforts. The TYSA program was founded in 2012 as a cross-sector collaborative response to the alarming rates of substance abuse on Staten Island, using a collective impact framework. In the four years since its founding, TYSA had accomplished a great deal. But by October 2016, when the case opens, many of the original members of TYSA's steering committee-most of whom had been high-level decision-makers in their organizations-were delegating their spots to mid-level staff who were not empowered to make organizational decisions. In addition, TYSA's early successes against prescription drug abuse were increasingly overshadowed by a growing opioid problem on the Island and by a continuing culture of alcohol abuse by underage teens. A subtler challenge was that, in the Staten Island community, TYSA was over-identified with Adrienne Abbate, TYSA's Project Director, herself; how could TYSA shift the community's perception to demonstrate the program's value beyond its leader? Project Director Adrienne Abbate decided to pull TYSA's executive leadership and staff together to discuss strategies to reinvigorate the program and to sustain the momentum they had fought so hard to create.

Case Authors : Deborah Milstein, Susan Madden, Teresa Chahine

Topic : Strategy & Execution

Related Areas : Social enterprise

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Calculating Net Present Value (NPV) at 6% for Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10008624)	-10008624	-	-
Year 1	3457855	-6550769	3457855	0.9434	3262127
Year 2	3973086	-2577683	7430941	0.89	3536032
Year 3	3965224	1387541	11396165	0.8396	3329279
Year 4	3251517	4639058	14647682	0.7921	2575506
TOTAL			14647682		12702944

The Net Present Value at 6% discount rate is 2694320

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. Tysa Staten 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 Tysa Staten 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 Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project

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 Strategy & Execution 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 Tysa Staten 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 Tysa Staten 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	(10008624)	-10008624	-	-
Year 1	3457855	-6550769	3457855	0.8696	3006830
Year 2	3973086	-2577683	7430941	0.7561	3004224
Year 3	3965224	1387541	11396165	0.6575	2607199
Year 4	3251517	4639058	14647682	0.5718	1859065
TOTAL					10477319

The Net NPV after 4 years is 468695

(10477319 - 10008624 )

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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	(10008624)	-10008624	-	-
Year 1	3457855	-6550769	3457855	0.8333	2881546
Year 2	3973086	-2577683	7430941	0.6944	2759088
Year 3	3965224	1387541	11396165	0.5787	2294690
Year 4	3251517	4639058	14647682	0.4823	1568054
TOTAL					9503377

The Net NPV after 4 years is -505247

At 20% discount rate the NPV is negative (9503377 - 10008624 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Tysa Staten 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 Tysa Staten has a NPV value higher than Zero then finance managers at Tysa Staten 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 Tysa Staten, then the stock price of the Tysa Staten 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 Tysa Staten 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 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 will be a multi year spillover effect of various taxation regulations.

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 Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project

References & Further Readings

Deborah Milstein, Susan Madden, Teresa Chahine (2018), "Tackling Youth Substance Abuse on Staten Island: A Collective Impact Project Harvard Business Review Case Study. Published by HBR Publications.