A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown 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 A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown case study is a Harvard Business School (HBR) case study written by Howard Husock, Brent Coffin. The A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown (referred as “Church Fellowship” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Government, International business, Organizational culture, Social responsibility, Strategic planning.

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 A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown Case Study

Twenty five years after its founding in members' homes, the non-denominational, evangelical Fellowship Bible Church of Little Rock, Arkansas had become a "mega-church", holding worship services on a 25-acre campus in one of the best locations in booming West Little Rock and attracting a combined 5,000 congregants on any given Sunday. But as the Fellowship congregation had grown, its leadership had come to believe that the Christian life must go beyond individual salvation and the responsibilities of family, friendship, and individual acts of charity and that church members must strive to be "socially responsible". In its effort to become a "church of irresistible influence", Fellowship Bible had taken the lead in organizing a massive citywide day of volunteer projects. In addition, ministries that had originated in small groups of church members-such as a sexual abstinence education program held in dozens of public and private schools-had taken on an independent life as well known free-standing organizations. Such efforts were made possible, in part, by charitable contributions made by Fellowship which totaled more than 25 percent ($3 million-plus) of its annual spending. This case tells the story of the next stage in church efforts to ameliorate social ills in Little Rock-an "external ministry" known as the "one church, one school, one neighborhood" project, announced in August 2004. Fellowship hoped that its assistance would demonstrably and measurably improve life in one of the city's most troubled areas-a 130-block area of central Little Rock. The project would include intensive mentoring of students one school in Little Rock's predominantly black South Midtown area (Fellowship itself was an almost entirely white congregation), efforts to work with African-American churches to encourage marriage in an area dominated by single-parent families, and an initiative to build new housing in the area. HKS Case Number 1780.0

Case Authors : Howard Husock, Brent Coffin

Topic : Innovation & Entrepreneurship

Related Areas : Government, International business, Organizational culture, Social responsibility, Strategic planning

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Calculating Net Present Value (NPV) at 6% for A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10024486)	-10024486	-	-
Year 1	3459742	-6564744	3459742	0.9434	3263908
Year 2	3971286	-2593458	7431028	0.89	3534430
Year 3	3953282	1359824	11384310	0.8396	3319252
Year 4	3237894	4597718	14622204	0.7921	2564715
TOTAL			14622204		12682305

The Net Present Value at 6% discount rate is 2657819

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. Profitability Index
4. Payback Period

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. Church Fellowship 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 Church Fellowship 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 A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown

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 Church Fellowship 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 Church Fellowship 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	(10024486)	-10024486	-	-
Year 1	3459742	-6564744	3459742	0.8696	3008471
Year 2	3971286	-2593458	7431028	0.7561	3002863
Year 3	3953282	1359824	11384310	0.6575	2599347
Year 4	3237894	4597718	14622204	0.5718	1851276
TOTAL					10461958

The Net NPV after 4 years is 437472

(10461958 - 10024486 )

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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	(10024486)	-10024486	-	-
Year 1	3459742	-6564744	3459742	0.8333	2883118
Year 2	3971286	-2593458	7431028	0.6944	2757838
Year 3	3953282	1359824	11384310	0.5787	2287779
Year 4	3237894	4597718	14622204	0.4823	1561484
TOTAL					9490219

The Net NPV after 4 years is -534267

At 20% discount rate the NPV is negative (9490219 - 10024486 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Church Fellowship 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 Church Fellowship has a NPV value higher than Zero then finance managers at Church Fellowship 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 Church Fellowship, then the stock price of the Church Fellowship 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 Church Fellowship 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 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.

What will be a multi year spillover effect of various taxation regulations.

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 A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown

References & Further Readings

Howard Husock, Brent Coffin (2018), "A Mega-Church Takes on Urban Problems: Fellowship Bible Comes to South Midtown Harvard Business Review Case Study. Published by HBR Publications.