Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann 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 Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann case study is a Harvard Business School (HBR) case study written by Catherine M. Dalton. The Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann (referred as “Hermann Bp” 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, Human resource management, International business.

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 Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann Case Study

Eliza Hermann is vice-president of Human Resources Strategy at BP plc, based in London, England. Her career in the energy business began in 1986 when she joined Amoco Corp., where she earned a series of promotions in the international oil business, which exposed her to markets ranging from Argentina to Azerbaijan. She was a member of the team involved in the successful integration of Amoco when BP acquired the company in 1998. During the past several years at BP, she has served as manager, Strategy and Business Transformation-Global Aromatics, leading a team responsible for strategic planning and business development in the company's petrochemical segment and, more recently, as VP of human resources for BP's global gas, power, and renewables segment. Throughout her career, Hermann has traveled extensively, with particular focus on Asia, Western Europe, North America, South America, Russia, and the republics of the former Soviet Union. Hermann holds an MBA degree from the Kelley School of Business, Indiana University, and a BA degree in social and behavioral sciences from John Hopkins University. She serves on the board of directors of Brightpoint, Inc., where she is chairperson of the Compensation and Human Resources Committee, as well as a member of the Corporate Governance and Nominating Committee.

Case Authors : Catherine M. Dalton

Topic : Leadership & Managing People

Related Areas : Human resource management, International business

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Calculating Net Present Value (NPV) at 6% for Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10021208)	-10021208	-	-
Year 1	3468392	-6552816	3468392	0.9434	3272068
Year 2	3972183	-2580633	7440575	0.89	3535229
Year 3	3941515	1360882	11382090	0.8396	3309372
Year 4	3228877	4589759	14610967	0.7921	2557573
TOTAL			14610967		12674242

The Net Present Value at 6% discount rate is 2653034

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. Net Present Value
2. Internal Rate of Return
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. Hermann Bp 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 Hermann Bp 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 Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann

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 Hermann Bp 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 Hermann Bp 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	(10021208)	-10021208	-	-
Year 1	3468392	-6552816	3468392	0.8696	3015993
Year 2	3972183	-2580633	7440575	0.7561	3003541
Year 3	3941515	1360882	11382090	0.6575	2591610
Year 4	3228877	4589759	14610967	0.5718	1846121
TOTAL					10457265

The Net NPV after 4 years is 436057

(10457265 - 10021208 )

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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	(10021208)	-10021208	-	-
Year 1	3468392	-6552816	3468392	0.8333	2890327
Year 2	3972183	-2580633	7440575	0.6944	2758460
Year 3	3941515	1360882	11382090	0.5787	2280969
Year 4	3228877	4589759	14610967	0.4823	1557136
TOTAL					9486892

The Net NPV after 4 years is -534316

At 20% discount rate the NPV is negative (9486892 - 10021208 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Hermann Bp 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 Hermann Bp has a NPV value higher than Zero then finance managers at Hermann Bp 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 Hermann Bp, then the stock price of the Hermann Bp 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 Hermann Bp 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.

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.

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 Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann

References & Further Readings

Catherine M. Dalton (2018), "Human Resource Management in a Global Environment: Keys for Personal and Organizational Success: An Interview with Eliza Hermann Harvard Business Review Case Study. Published by HBR Publications.