New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty 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 New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty case study is a Harvard Business School (HBR) case study written by Anjani Datla, Julie Boatright Wilson, Dan Levy. The New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty (referred as “White Programs” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Budgeting, Economy, Joint ventures, Policy, 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 New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty Case Study

In late 2006, New York City Mayor Michael Bloomberg created the Center for Economic Opportunity (CEO). Born out of recommendations made by the Bloomberg appointed public-private Commission for Economic Opportunity, CEO was designed to be an innovations lab that would test anti-poverty programs by applying a results-based approach. With a budget of $100 million, CEO would closely monitor new programs and hold them accountable for producing measurable results. Uniquely, CEO would cut funding for programs that did not "make the grade." Bloomberg named Veronica White the Executive Director of CEO. White had decades of experience working in executive positions in several New York City agencies but with CEO she had daunting tasks ahead. She would have to redefine how poverty was measured in the city, facilitate cross agency partnerships, and most important, develop an effective and achievable evaluation system for all programs. This case traces the CEO team's challenges in placing program evaluation at the core of their mission. CEO programs are geared toward three target populations-working poor adults, young adults between the ages of 16 and 24, and families with children ages five and below. In the first year of operation, White and her team launched a slate of anti-poverty programs that varied widely in scale and scope and ranged from New York's first ever conditional cash transfer program to a program that would accelerate graduation rates in community colleges. But from the beginning, CEO's evidence-based programming was put to the test. White faced constant pressure to "produce results quickly." With the 2008 recession, however, CEO endured significant cuts in its evaluation budget. White and her team had to make the most of limited resources while still sustaining a comprehensive evaluation policy. Case Number 1971.0

Case Authors : Anjani Datla, Julie Boatright Wilson, Dan Levy

Topic : Global Business

Related Areas : Budgeting, Economy, Joint ventures, Policy, Social enterprise

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Calculating Net Present Value (NPV) at 6% for New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10003608)	-10003608	-	-
Year 1	3444646	-6558962	3444646	0.9434	3249666
Year 2	3967639	-2591323	7412285	0.89	3531185
Year 3	3964135	1372812	11376420	0.8396	3328364
Year 4	3239868	4612680	14616288	0.7921	2566279
TOTAL			14616288		12675494

The Net Present Value at 6% discount rate is 2671886

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. Timing of the expected cash flows – stockholders of White Programs 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. White Programs 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 New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty

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 Global Business 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 White Programs 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 White Programs 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	(10003608)	-10003608	-	-
Year 1	3444646	-6558962	3444646	0.8696	2995344
Year 2	3967639	-2591323	7412285	0.7561	3000105
Year 3	3964135	1372812	11376420	0.6575	2606483
Year 4	3239868	4612680	14616288	0.5718	1852405
TOTAL					10454338

The Net NPV after 4 years is 450730

(10454338 - 10003608 )

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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	(10003608)	-10003608	-	-
Year 1	3444646	-6558962	3444646	0.8333	2870538
Year 2	3967639	-2591323	7412285	0.6944	2755305
Year 3	3964135	1372812	11376420	0.5787	2294060
Year 4	3239868	4612680	14616288	0.4823	1562436
TOTAL					9482339

The Net NPV after 4 years is -521269

At 20% discount rate the NPV is negative (9482339 - 10003608 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of White Programs 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 White Programs has a NPV value higher than Zero then finance managers at White Programs 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 White Programs, then the stock price of the White Programs 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 White Programs 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.

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 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 New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty

References & Further Readings

Anjani Datla, Julie Boatright Wilson, Dan Levy (2018), "New York City Center for Economic Opportunity: An Evidence-Based Approach to Alleviate Poverty Harvard Business Review Case Study. Published by HBR Publications.