An English Teacher in South Korea 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 An English Teacher in South Korea case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. An English Teacher in South Korea case study is a Harvard Business School (HBR) case study written by Stacey R. Fitzsimmons, Paul Shantz. The An English Teacher in South Korea (referred as “Korea English” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Human resource management, International business.

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 An English Teacher in South Korea Case Study

Bert took a position to teach English in South Korea after graduating with his business degree from a Canadian University. It was his second time teaching English in South Korea, and since he had a fantastic experience the first time, he took a second position without doing a lot of due diligence before arrival. Soon, however, he realized that a city tax was being deducted from his pay, and he had suspicions that his boss was making up the city tax, in order to deduct money from the English teachers' pay. Since Bert's visa to stay in the country was tied to his employer, he could not look for a new employer, nor could he effectively find legal recourse against his employer, because foreign teachers had few rights in South Korea. This case was designed to be used in an undergraduate organizational behaviour, business ethics or international management course. It was written using casual language and a first-person perspective because the main character is only a few years older than the students in a typical undergraduate classroom, so many of them will relate to the main character and his experiences in this situation.

Case Authors : Stacey R. Fitzsimmons, Paul Shantz

Topic : Global Business

Related Areas : Human resource management, International business

Calculating Net Present Value (NPV) at 6% for An English Teacher in South Korea Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10025509) -10025509 - -
Year 1 3450850 -6574659 3450850 0.9434 3255519
Year 2 3976608 -2598051 7427458 0.89 3539167
Year 3 3943892 1345841 11371350 0.8396 3311368
Year 4 3230146 4575987 14601496 0.7921 2558578
TOTAL 14601496 12664632

The Net Present Value at 6% discount rate is 2639123

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. Payback Period
2. Net Present Value
3. Profitability Index
4. Internal Rate of Return

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 Korea English 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. Korea English 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 An English Teacher in South Korea

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 Korea English 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 Korea English 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 (10025509) -10025509 - -
Year 1 3450850 -6574659 3450850 0.8696 3000739
Year 2 3976608 -2598051 7427458 0.7561 3006887
Year 3 3943892 1345841 11371350 0.6575 2593173
Year 4 3230146 4575987 14601496 0.5718 1846846
TOTAL 10447646

The Net NPV after 4 years is 422137

(10447646 - 10025509 )

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 (10025509) -10025509 - -
Year 1 3450850 -6574659 3450850 0.8333 2875708
Year 2 3976608 -2598051 7427458 0.6944 2761533
Year 3 3943892 1345841 11371350 0.5787 2282345
Year 4 3230146 4575987 14601496 0.4823 1557748
TOTAL 9477334

The Net NPV after 4 years is -548175

At 20% discount rate the NPV is negative (9477334 - 10025509 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Korea English 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 Korea English has a NPV value higher than Zero then finance managers at Korea English 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 Korea English, then the stock price of the Korea English 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 Korea English 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 can impact the cash flow of the project.

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.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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

Stacey R. Fitzsimmons, Paul Shantz (2018), "An English Teacher in South Korea Harvard Business Review Case Study. Published by HBR Publications.