Motivated Reasoning, Leadership and Team Performance 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 Motivated Reasoning, Leadership and Team Performance case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Motivated Reasoning, Leadership and Team Performance case study is a Harvard Business School (HBR) case study written by Syed Salman Ahmad, Sheetanshu Mishra, Santosh Kumar. The Motivated Reasoning, Leadership and Team Performance (referred as “Team's Student” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. 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 Motivated Reasoning, Leadership and Team Performance Case Study

This case revolves around the experiences of an MBA student at an Indian business school. The student is dynamic, capable and intent on high achievement, but his pursuit of recognition eventually hampers his and his team's learning and performance. The case is based on an event that happens within a course on organizational behaviour where the student makes a major mistake in his analysis of a case due to his need to demonstrate his competence and validate himself. This hurts his and his team's performance on an assigned task. After the event, the student and his team members reflect on the events that led to this mistake. They also take the Myers-Briggs Type Indicator (MBTI) and the Fundamental Interpersonal Relations Orientation - Behavior (FIRO-B) assessments to determine their personality preferences and interpersonal needs that might have influenced the team's functioning. Author Syed Salman Ahmad is affiliated with Copenhagen Business School. Authors Sheetanshu Mishra and Santosh Kumar are affiliated with the Institute of Management Technology, Nagpur

Case Authors : Syed Salman Ahmad, Sheetanshu Mishra, Santosh Kumar

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Motivated Reasoning, Leadership and Team Performance Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10017127)	-10017127	-	-
Year 1	3444499	-6572628	3444499	0.9434	3249527
Year 2	3978260	-2594368	7422759	0.89	3540637
Year 3	3969710	1375342	11392469	0.8396	3333045
Year 4	3238080	4613422	14630549	0.7921	2564863
TOTAL			14630549		12688072

The Net Present Value at 6% discount rate is 2670945

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. Net Present Value
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. Team's Student 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 Team's Student 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 Motivated Reasoning, Leadership and Team Performance

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 Leadership & Managing People 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 Team's Student 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 Team's Student 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	(10017127)	-10017127	-	-
Year 1	3444499	-6572628	3444499	0.8696	2995217
Year 2	3978260	-2594368	7422759	0.7561	3008136
Year 3	3969710	1375342	11392469	0.6575	2610149
Year 4	3238080	4613422	14630549	0.5718	1851383
TOTAL					10464884

The Net NPV after 4 years is 447757

(10464884 - 10017127 )

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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	(10017127)	-10017127	-	-
Year 1	3444499	-6572628	3444499	0.8333	2870416
Year 2	3978260	-2594368	7422759	0.6944	2762681
Year 3	3969710	1375342	11392469	0.5787	2297286
Year 4	3238080	4613422	14630549	0.4823	1561574
TOTAL					9491956

The Net NPV after 4 years is -525171

At 20% discount rate the NPV is negative (9491956 - 10017127 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Team's Student 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 Team's Student has a NPV value higher than Zero then finance managers at Team's Student 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 Team's Student, then the stock price of the Team's Student 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 Team's Student 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 will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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.

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Negotiation Strategy of Motivated Reasoning, Leadership and Team Performance

References & Further Readings

Syed Salman Ahmad, Sheetanshu Mishra, Santosh Kumar (2018), "Motivated Reasoning, Leadership and Team Performance Harvard Business Review Case Study. Published by HBR Publications.