Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours 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 Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours case study is a Harvard Business School (HBR) case study written by Christine Pearson. The Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours (referred as “Salta Micro” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Innovation.

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 Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours Case Study

This case examines Project Salta (Salta) a multi-year collaborative experiment among financial institutions, a foreign government aid agency, and a global management school. Binding goals of Salta were to provide practical business information in sessions of short duration to micro-entrepreneurs operating at or near the bottom of the socio-economic pyramid, while keeping sponsors' costs exceptionally low. Salta serves as a test case and potential template for organizations investing in educating micro-entrepreneurs via lessons that are information, engaging, memorable and affordable. Details are provided regarding the origins and setting of the Salta program, its targeted participants, and parameters for the roll-out of the program. Students using the case are challenged to think creatively about how they would translate their understanding of basic business knowledge into the fundamentals needed to thrive as a micro-entrepreneur in a developing country. The case is especially relevant to individuals or organizations considering or engaging in corporate social responsibility opportunities. It is also highly relevant to empowerment of women at or near the base of the socio-economic pyramid, as well as micro-entrepreneurs in developing countries. Lessons center on challenges and advantages of educational philanthropy for these populations.

Case Authors : Christine Pearson

Topic : Innovation & Entrepreneurship

Related Areas : Innovation

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Calculating Net Present Value (NPV) at 6% for Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10000986)	-10000986	-	-
Year 1	3460471	-6540515	3460471	0.9434	3264595
Year 2	3955500	-2585015	7415971	0.89	3520381
Year 3	3937564	1352549	11353535	0.8396	3306055
Year 4	3248527	4601076	14602062	0.7921	2573138
TOTAL			14602062		12664169

The Net Present Value at 6% discount rate is 2663183

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. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Salta Micro 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 Salta Micro 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 Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours

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 Salta Micro 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 Salta Micro 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	(10000986)	-10000986	-	-
Year 1	3460471	-6540515	3460471	0.8696	3009105
Year 2	3955500	-2585015	7415971	0.7561	2990926
Year 3	3937564	1352549	11353535	0.6575	2589012
Year 4	3248527	4601076	14602062	0.5718	1857356
TOTAL					10446400

The Net NPV after 4 years is 445414

(10446400 - 10000986 )

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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	(10000986)	-10000986	-	-
Year 1	3460471	-6540515	3460471	0.8333	2883726
Year 2	3955500	-2585015	7415971	0.6944	2746875
Year 3	3937564	1352549	11353535	0.5787	2278683
Year 4	3248527	4601076	14602062	0.4823	1566612
TOTAL					9475896

The Net NPV after 4 years is -525090

At 20% discount rate the NPV is negative (9475896 - 10000986 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Salta Micro 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 Salta Micro has a NPV value higher than Zero then finance managers at Salta Micro 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 Salta Micro, then the stock price of the Salta Micro 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 Salta Micro 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.

Understanding of risks involved in the project.

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 Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours

References & Further Readings

Christine Pearson (2018), "Empowering Female Micro-entrepreneurs through Education: Raising Half the Sky in Just Three Hours Harvard Business Review Case Study. Published by HBR Publications.