Social Enterprise Under Adversity: Bridge EXP in Kibera (A) 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 Social Enterprise Under Adversity: Bridge EXP in Kibera (A) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Social Enterprise Under Adversity: Bridge EXP in Kibera (A) case study is a Harvard Business School (HBR) case study written by Oana Branzei, Eduardo Zarate. The Social Enterprise Under Adversity: Bridge EXP in Kibera (A) (referred as “Insta Insta's” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Entrepreneurial management, Marketing, Organizational structure.

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 Social Enterprise Under Adversity: Bridge EXP in Kibera (A) Case Study

The case illustrates the opportunities, challenges and trade-offs involved in developing a pro-social business venture in emerging economies by outlining the interplay between a Nairobi-based venture by Insta Products (Insta) and a Toronto-based non-profit volunteering consultancy for sustainable new ventures with a high potential to accelerate local development. Set in the midst of social unrest in the spring of 2008, the consulting team prepares to give their strategic recommendation based on detailed entrepreneurial, financial and marketing considerations. Focused on the commercial introduction of enriched flours to the retail market in Kenya, the opportunity presented is expected to double the production of Insta in 5 years while building a stable Ksh2.1 billion business. The new venture represents a pro-social corporate venture by a 15-year old company with strong capabilities in relief food aid. Insta had been engaged with CARE Kenya and Acumen Fund to solicit funding, and had commissioned independent market research. The Bridge Expedition Partners stepped in to review the business plan and offer financial modeling and market analysis to assess Insta Products in opportunity evaluation and the implementation of the new venture. The decision boils down to how Insta framed the venturing opportunity. If Insta focused on affordability, they would minimize pack size and focus on kiosk distribution. If, however, the most important driver for low-income families when purchasing the porridge-like product uji was price sensitivity instead, Insta could be better off launching with larger packages, distributed through dukas and supermarkets, where Insta's products and prices would be compared against established uji producers. The case ask students to make this decision, taking on either the roles of Insta's representatives and/or the Bridge consulting teams as the three Ivey MBAs engage in complex modeling and draw on the expertise of local and international students.

Case Authors : Oana Branzei, Eduardo Zarate

Topic : Global Business

Related Areas : Entrepreneurial management, Marketing, Organizational structure

Calculating Net Present Value (NPV) at 6% for Social Enterprise Under Adversity: Bridge EXP in Kibera (A) Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10024382) -10024382 - -
Year 1 3469683 -6554699 3469683 0.9434 3273286
Year 2 3976705 -2577994 7446388 0.89 3539253
Year 3 3942048 1364054 11388436 0.8396 3309820
Year 4 3235822 4599876 14624258 0.7921 2563074
TOTAL 14624258 12685433

The Net Present Value at 6% discount rate is 2661051

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. Internal Rate of Return
2. Payback Period
3. Profitability Index
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 Insta Insta's 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. Insta Insta's 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 Social Enterprise Under Adversity: Bridge EXP in Kibera (A)

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 Insta Insta's 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 Insta Insta's 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 (10024382) -10024382 - -
Year 1 3469683 -6554699 3469683 0.8696 3017116
Year 2 3976705 -2577994 7446388 0.7561 3006960
Year 3 3942048 1364054 11388436 0.6575 2591961
Year 4 3235822 4599876 14624258 0.5718 1850092
TOTAL 10466128

The Net NPV after 4 years is 441746

(10466128 - 10024382 )

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 (10024382) -10024382 - -
Year 1 3469683 -6554699 3469683 0.8333 2891403
Year 2 3976705 -2577994 7446388 0.6944 2761601
Year 3 3942048 1364054 11388436 0.5787 2281278
Year 4 3235822 4599876 14624258 0.4823 1560485
TOTAL 9494766

The Net NPV after 4 years is -529616

At 20% discount rate the NPV is negative (9494766 - 10024382 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Insta Insta's 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 Insta Insta's has a NPV value higher than Zero then finance managers at Insta Insta's 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 Insta Insta's, then the stock price of the Insta Insta's 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 Insta Insta's 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.

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.

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.

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.

References & Further Readings

Oana Branzei, Eduardo Zarate (2018), "Social Enterprise Under Adversity: Bridge EXP in Kibera (A) Harvard Business Review Case Study. Published by HBR Publications.