Credit for Women's Microenterprises: Assessing a Social Project 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 Credit for Women's Microenterprises: Assessing a Social Project case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Credit for Women's Microenterprises: Assessing a Social Project case study is a Harvard Business School (HBR) case study written by Arlette Beltran, Betty Alvarado, Hanny Cueva. The Credit for Women's Microenterprises: Assessing a Social Project (referred as “Evaluators Stage” 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 Credit for Women's Microenterprises: Assessing a Social Project Case Study

This case is based on an ex post assessment conducted in Peru. The circumstances surrounding this evaluation were very restrictive: a limited budget as well as lacking base line and adequate monitoring system. The evaluation was requested at the endof the project, with the evaluators having no control over the information gathered earlier; however, they tried to use the best methodological options available to assess the program. Suddenly, an opportunity presents itself for the evaluators to recommend a better assessment methodology for the second stage in this program and even to suggest some adjustments for its original program design. A special feature in this case is that students do not start from scratch: they have information about what happened in the first stage of the project, and they can use it to build, amidst a new setting, a sounder, more ambitious evaluation procedure for the second stage, before its launching. The social and economic effects/impact of the project's first stage were measured with a non-experimental method, without a control group. For their evaluation work, the consultants relied on two surveys administered to a group of selected women's organizations that had received micro-loans. The first survey focused on the progress made by business ventures funded with these loans, and the second one probed the social impact of the project on members' households. Against the described backdrop, in the first stage, the evaluators used the perceptions of the people involved in the project to gather information on their earlier situation. The second stage evaluation would have a more adequate assessment design and would be submitted with recommendations for project execution improvements. To this end, consultants would have to submit their technical plan and the budget required to successfully meet assessment expectations. Universidad del PacA?fico' case collection

Case Authors : Arlette Beltran, Betty Alvarado, Hanny Cueva

Topic : Innovation & Entrepreneurship

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Credit for Women's Microenterprises: Assessing a Social Project Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10013455)	-10013455	-	-
Year 1	3445410	-6568045	3445410	0.9434	3250387
Year 2	3957663	-2610382	7403073	0.89	3522306
Year 3	3957841	1347459	11360914	0.8396	3323080
Year 4	3251697	4599156	14612611	0.7921	2575649
TOTAL			14612611		12671421

The Net Present Value at 6% discount rate is 2657966

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. Net Present Value
3. Payback Period
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. Timing of the expected cash flows – stockholders of Evaluators Stage 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. Evaluators Stage shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Credit for Women's Microenterprises: Assessing a Social Project

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 Evaluators Stage 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 Evaluators Stage 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	(10013455)	-10013455	-	-
Year 1	3445410	-6568045	3445410	0.8696	2996009
Year 2	3957663	-2610382	7403073	0.7561	2992562
Year 3	3957841	1347459	11360914	0.6575	2602345
Year 4	3251697	4599156	14612611	0.5718	1859168
TOTAL					10450084

The Net NPV after 4 years is 436629

(10450084 - 10013455 )

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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	(10013455)	-10013455	-	-
Year 1	3445410	-6568045	3445410	0.8333	2871175
Year 2	3957663	-2610382	7403073	0.6944	2748377
Year 3	3957841	1347459	11360914	0.5787	2290417
Year 4	3251697	4599156	14612611	0.4823	1568141
TOTAL					9478110

The Net NPV after 4 years is -535345

At 20% discount rate the NPV is negative (9478110 - 10013455 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Evaluators Stage 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 Evaluators Stage has a NPV value higher than Zero then finance managers at Evaluators Stage 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 Evaluators Stage, then the stock price of the Evaluators Stage 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 Evaluators Stage 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 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.

Understanding of risks involved in 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.

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 Credit for Women's Microenterprises: Assessing a Social Project

References & Further Readings

Arlette Beltran, Betty Alvarado, Hanny Cueva (2018), "Credit for Women's Microenterprises: Assessing a Social Project Harvard Business Review Case Study. Published by HBR Publications.