Business Process Outsourcing at Apollo Health Street 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 Business Process Outsourcing at Apollo Health Street case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Business Process Outsourcing at Apollo Health Street case study is a Harvard Business School (HBR) case study written by Christopher Williams, Chandra Sekhar Ramasastry. The Business Process Outsourcing at Apollo Health Street (referred as “Ahs Bpo” from here on) case study provides evaluation & decision scenario in field of Global Business. 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

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Case Description of Business Process Outsourcing at Apollo Health Street Case Study

The managing director of Apollo Health Street (AHS), a healthcare business process outsourcing (BPO) company headquartered in Pennsylvania, United States, was pondering two dilemmas: securing short term growth for his company, and finding new ways to compete in a changing industry. AHS was itself a subsidiary of Apollo Health Enterprises Ltd. (AHEL), an integrated healthcare company located in Hyderabad in southern India. AHS had been growing at 80 per cent compound annual growth rate (CAGR) since 2005, aiming to reach $100 million in sales by March 2010. Its target was to increase annual sales to $500 million within three years in a highly competitive space, which if successful would move AHS into the top three BPO companies in the healthcare sector. How should it secure short term growth? The second dilemma was how to plan for the future. Industry analysts had predicted that over the next five to 10 years, healthcare BPO would become unrecognizable from its current form. The managing director believed that although scaling up would strengthen the company's position for the short term, the company should also be looking for solutions to stay relevant to the customer. How should AHS influence the shape of healthcare BPO in the future? What new ways of competing could the company pursue?

Case Authors : Christopher Williams, Chandra Sekhar Ramasastry

Topic : Global Business

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Business Process Outsourcing at Apollo Health Street Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10017605)	-10017605	-	-
Year 1	3449724	-6567881	3449724	0.9434	3254457
Year 2	3978124	-2589757	7427848	0.89	3540516
Year 3	3942572	1352815	11370420	0.8396	3310259
Year 4	3228972	4581787	14599392	0.7921	2557648
TOTAL			14599392		12662881

The Net Present Value at 6% discount rate is 2645276

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. Profitability Index
2. Net Present Value
3. Internal Rate of Return
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 Ahs Bpo 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. Ahs Bpo 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 Business Process Outsourcing at Apollo Health Street

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 Ahs Bpo 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 Ahs Bpo 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	(10017605)	-10017605	-	-
Year 1	3449724	-6567881	3449724	0.8696	2999760
Year 2	3978124	-2589757	7427848	0.7561	3008033
Year 3	3942572	1352815	11370420	0.6575	2592305
Year 4	3228972	4581787	14599392	0.5718	1846175
TOTAL					10446274

The Net NPV after 4 years is 428669

(10446274 - 10017605 )

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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	(10017605)	-10017605	-	-
Year 1	3449724	-6567881	3449724	0.8333	2874770
Year 2	3978124	-2589757	7427848	0.6944	2762586
Year 3	3942572	1352815	11370420	0.5787	2281581
Year 4	3228972	4581787	14599392	0.4823	1557182
TOTAL					9476119

The Net NPV after 4 years is -541486

At 20% discount rate the NPV is negative (9476119 - 10017605 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ahs Bpo 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 Ahs Bpo has a NPV value higher than Zero then finance managers at Ahs Bpo 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 Ahs Bpo, then the stock price of the Ahs Bpo 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 Ahs Bpo 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 –

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.

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.

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 Business Process Outsourcing at Apollo Health Street

References & Further Readings

Christopher Williams, Chandra Sekhar Ramasastry (2018), "Business Process Outsourcing at Apollo Health Street Harvard Business Review Case Study. Published by HBR Publications.