SNA Educa (ex Codesser), Spanish Version 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 SNA Educa (ex Codesser), Spanish Version case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. SNA Educa (ex Codesser), Spanish Version case study is a Harvard Business School (HBR) case study written by Mladen Koljatic, Monica Silva. The SNA Educa (ex Codesser), Spanish Version (referred as “Sna Educa” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. 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 SNA Educa (ex Codesser), Spanish Version Case Study

SNA Educa (previously known as Codesser) is a non-profit organization which was created by the National Association of Farmers (Sociedad Nacional de Agricultura, SNA) in Chile. Its mission included improving the living conditions of people associated with rural activities. One way of doing this was by offering agricultural and technical education to low-income students in rural areas. SNA Educa currently manages around 20 high schools in different regions of Chile. In the early 2000, SNA Educa made a major decision: to buy a school to provide primary and secondary scientific humanistic education, a field in which the organization had neither previous educational experience nor managing skills. Even though the investment decision had proven financially convenient, several issues cast some doubts about the suitability of the decision: inadequate mission fit, low educational test scores of the school, the troublesome political environment related to school reform, child abuse in the school, , among others. After ten years of the acquisition, the board is now debating whether it should reverse its previous decision and sell the school. Pontificia Universidad CatA?lica de Chile

Case Authors : Mladen Koljatic, Monica Silva

Topic : Innovation & Entrepreneurship

Related Areas :

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Calculating Net Present Value (NPV) at 6% for SNA Educa (ex Codesser), Spanish Version Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020542)	-10020542	-	-
Year 1	3457879	-6562663	3457879	0.9434	3262150
Year 2	3972031	-2590632	7429910	0.89	3535093
Year 3	3973390	1382758	11403300	0.8396	3336135
Year 4	3247256	4630014	14650556	0.7921	2572131
TOTAL			14650556		12705509

The Net Present Value at 6% discount rate is 2684967

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. Profitability Index
3. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Sna Educa shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Sna Educa have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of SNA Educa (ex Codesser), Spanish Version

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 Innovation & Entrepreneurship 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 Sna Educa 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 Sna Educa 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	(10020542)	-10020542	-	-
Year 1	3457879	-6562663	3457879	0.8696	3006851
Year 2	3972031	-2590632	7429910	0.7561	3003426
Year 3	3973390	1382758	11403300	0.6575	2612568
Year 4	3247256	4630014	14650556	0.5718	1856629
TOTAL					10479475

The Net NPV after 4 years is 458933

(10479475 - 10020542 )

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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	(10020542)	-10020542	-	-
Year 1	3457879	-6562663	3457879	0.8333	2881566
Year 2	3972031	-2590632	7429910	0.6944	2758355
Year 3	3973390	1382758	11403300	0.5787	2299416
Year 4	3247256	4630014	14650556	0.4823	1565999
TOTAL					9505335

The Net NPV after 4 years is -515207

At 20% discount rate the NPV is negative (9505335 - 10020542 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Sna Educa 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 Sna Educa has a NPV value higher than Zero then finance managers at Sna Educa 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 Sna Educa, then the stock price of the Sna Educa 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 Sna Educa 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.

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.

Understanding of risks involved in 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 SNA Educa (ex Codesser), Spanish Version

References & Further Readings

Mladen Koljatic, Monica Silva (2018), "SNA Educa (ex Codesser), Spanish Version Harvard Business Review Case Study. Published by HBR Publications.