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Garrett Moran and Scaling Year Up to Close the Opportunity Divide 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 Garrett Moran and Scaling Year Up to Close the Opportunity Divide case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Garrett Moran and Scaling Year Up to Close the Opportunity Divide case study is a Harvard Business School (HBR) case study written by Rosabeth Moss Kanter, Emma Franking. The Garrett Moran and Scaling Year Up to Close the Opportunity Divide (referred as “Moran Garrett” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Growth strategy, Social enterprise.

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 Garrett Moran and Scaling Year Up to Close the Opportunity Divide Case Study


Garrett Moran joined Year Up (a workforce development program) in late 2013. Tasked with systematizing and scaling operations, Moran spearheaded a number of changes that allowed Year Up to serve 3,000 youth in 2016 up from 1,800 youth annually when he started. While preparing for the future, he expected that Year Up would soon have the ability to serve 10,000 students annually by 2021. This goal would demand a pace of growth that YU had not yet experienced - increasing annual growth from an already accelerated 400 students per year over the past three years to an average of 1,000 students per year through 2021. The path forward was complicated and this case covers the challenges and opportunities of reaching scale by expanding their direct service program and exploring other ways to close the opportunity gap.


Case Authors : Rosabeth Moss Kanter, Emma Franking

Topic : Innovation & Entrepreneurship

Related Areas : Growth strategy, Social enterprise




Calculating Net Present Value (NPV) at 6% for Garrett Moran and Scaling Year Up to Close the Opportunity Divide Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10027343) -10027343 - -
Year 1 3445561 -6581782 3445561 0.9434 3250529
Year 2 3968058 -2613724 7413619 0.89 3531557
Year 3 3953619 1339895 11367238 0.8396 3319535
Year 4 3221969 4561864 14589207 0.7921 2552101
TOTAL 14589207 12653723


The Net Present Value at 6% discount rate is 2626380

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

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. Moran Garrett 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 Moran Garrett have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of Garrett Moran and Scaling Year Up to Close the Opportunity Divide

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 Moran Garrett 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 Moran Garrett 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 (10027343) -10027343 - -
Year 1 3445561 -6581782 3445561 0.8696 2996140
Year 2 3968058 -2613724 7413619 0.7561 3000422
Year 3 3953619 1339895 11367238 0.6575 2599569
Year 4 3221969 4561864 14589207 0.5718 1842171
TOTAL 10438302


The Net NPV after 4 years is 410959

(10438302 - 10027343 )






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 (10027343) -10027343 - -
Year 1 3445561 -6581782 3445561 0.8333 2871301
Year 2 3968058 -2613724 7413619 0.6944 2755596
Year 3 3953619 1339895 11367238 0.5787 2287974
Year 4 3221969 4561864 14589207 0.4823 1553804
TOTAL 9468675


The Net NPV after 4 years is -558668

At 20% discount rate the NPV is negative (9468675 - 10027343 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Moran Garrett 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 Moran Garrett has a NPV value higher than Zero then finance managers at Moran Garrett 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 Moran Garrett, then the stock price of the Moran Garrett 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 Moran Garrett 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 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 will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of 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

Rosabeth Moss Kanter, Emma Franking (2018), "Garrett Moran and Scaling Year Up to Close the Opportunity Divide Harvard Business Review Case Study. Published by HBR Publications.