Transformational Change and Leader Character 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 Transformational Change and Leader Character case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Transformational Change and Leader Character case study is a Harvard Business School (HBR) case study written by Gerard Seijts, Jeffrey Gandz. The Transformational Change and Leader Character (referred as “Character Dimensions” 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, Leadership, Leadership development.

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 Transformational Change and Leader Character Case Study

Leader character is foundational to good leadership. We define character as an amalgam of virtues, values, and personality traits that influence how leaders behave in various contexts. Our research identified 11 dimensions of leader character and 60-plus character elements that are illustrative of those dimensions. We integrate two frameworks: John Kotter's eight-step model of leading change and our framework of leader character dimensions and associated elements. Specifically, the objective of this article is to illustrate which dimensions of leader character come into play at various points in the organizational change process and how their presence or absence affects the outcomes of the change process. Beyond that, we draw inferences about how organizations might develop character among all leaders but especially those younger, less experienced leaders who will become tomorrow's leaders of change projects.

Case Authors : Gerard Seijts, Jeffrey Gandz

Topic : Leadership & Managing People

Related Areas : Leadership, Leadership development

Calculating Net Present Value (NPV) at 6% for Transformational Change and Leader Character Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10000454) -10000454 - -
Year 1 3458620 -6541834 3458620 0.9434 3262849
Year 2 3979412 -2562422 7438032 0.89 3541663
Year 3 3960852 1398430 11398884 0.8396 3325608
Year 4 3251491 4649921 14650375 0.7921 2575485
TOTAL 14650375 12705605

The Net Present Value at 6% discount rate is 2705151

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. Profitability Index
2. Payback Period
3. Internal Rate of Return
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. Timing of the expected cash flows – stockholders of Character Dimensions 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. Character Dimensions shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

Formula and Steps to Calculate Net Present Value (NPV) of Transformational Change and Leader Character

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 Character Dimensions 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 Character Dimensions 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 %
Cash Flows
Year 0 (10000454) -10000454 - -
Year 1 3458620 -6541834 3458620 0.8696 3007496
Year 2 3979412 -2562422 7438032 0.7561 3009007
Year 3 3960852 1398430 11398884 0.6575 2604324
Year 4 3251491 4649921 14650375 0.5718 1859051
TOTAL 10479878

The Net NPV after 4 years is 479424

(10479878 - 10000454 )

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 %
Cash Flows
Year 0 (10000454) -10000454 - -
Year 1 3458620 -6541834 3458620 0.8333 2882183
Year 2 3979412 -2562422 7438032 0.6944 2763481
Year 3 3960852 1398430 11398884 0.5787 2292160
Year 4 3251491 4649921 14650375 0.4823 1568042
TOTAL 9505865

The Net NPV after 4 years is -494589

At 20% discount rate the NPV is negative (9505865 - 10000454 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Character Dimensions 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 Character Dimensions has a NPV value higher than Zero then finance managers at Character Dimensions 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 Character Dimensions, then the stock price of the Character Dimensions 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 Character Dimensions 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 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.

Understanding of risks involved in the project.

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

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.

Negotiation Strategy of Transformational Change and Leader Character

References & Further Readings

Gerard Seijts, Jeffrey Gandz (2018), "Transformational Change and Leader Character Harvard Business Review Case Study. Published by HBR Publications.

J.Front Retailing SWOT Analysis / TOWS Matrix

Services , Retail (Department & Discount)

Chengdu Xuguang SWOT Analysis / TOWS Matrix

Technology , Electronic Instr. & Controls

Lvjing Holding A SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services

Nick Scali SWOT Analysis / TOWS Matrix

Services , Retail (Specialty)

Xinlong Hold A SWOT Analysis / TOWS Matrix

Consumer Cyclical , Textiles - Non Apparel

Japan Excellent SWOT Analysis / TOWS Matrix

Services , Real Estate Operations

Kiddieland International SWOT Analysis / TOWS Matrix

Consumer Cyclical , Recreational Products

Amore Group SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Personal & Household Prods.

Nano SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing