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The Indian Greenpreneur: Management of Frenemy Talent and Coopetition 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 The Indian Greenpreneur: Management of Frenemy Talent and Coopetition case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Indian Greenpreneur: Management of Frenemy Talent and Coopetition case study is a Harvard Business School (HBR) case study written by Jyotsna Bhatnagar, Neha Paliwal Sharma, Nakul Gupta. The The Indian Greenpreneur: Management of Frenemy Talent and Coopetition (referred as “Ghc Frenemy” 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, International business, Leadership, Organizational culture, Strategy.

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 The Indian Greenpreneur: Management of Frenemy Talent and Coopetition Case Study


During the 2013 Indian festival of colours, a young green entrepreneur and owner of Green Horizon Consulting (GHC) faced a plethora of business growth challenges. His former employee, who had quit GHC a while back to work for a major rival, wanted to return. However, the entrepreneur could not figure it out - would rehiring an ex-employee be a sound business decision? Should he take a risk and give the former employee another chance? If he did, he could look after GHC business in India, and be free to work on his plans to start a new venture in Dubai.But, his dilemma didn't end there. Being the eldest son in his family, he realized that besides the aforementioned strategies, there was also the possibility of living and working with his joint family. His father was getting old and his younger brother had joined the family business; merging the two companies (his and his father's) would allow both brothers to take care of the businesses and family between them. If that happened, he would no longer need his old frenemy. Even so, there was no doubt in his mind that relocating to Dubai would be a very lucrative move, especially as prospective clients in this region understood the language of green loud and clear. But, despite his excitement at the idea, he could not forget that there would still be all the usual (yet critical) business problems of low consumer awareness and the need to swiftly catch up to the existing competition. What other factors and options would he need to consider to keep his budding, eco-friendly company afloat and to successfully navigate the contemporary business world? Jyotsna Bhatnagar and Neha Paliwal Sharma is from Management Development Institute Gurgaon. Nakul Gupta is from Indian Institute of Management, Kashipur.


Case Authors : Jyotsna Bhatnagar, Neha Paliwal Sharma, Nakul Gupta

Topic : Leadership & Managing People

Related Areas : International business, Leadership, Organizational culture, Strategy




Calculating Net Present Value (NPV) at 6% for The Indian Greenpreneur: Management of Frenemy Talent and Coopetition Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10008707) -10008707 - -
Year 1 3453470 -6555237 3453470 0.9434 3257991
Year 2 3963286 -2591951 7416756 0.89 3527310
Year 3 3939033 1347082 11355789 0.8396 3307288
Year 4 3247850 4594932 14603639 0.7921 2572601
TOTAL 14603639 12665190


The Net Present Value at 6% discount rate is 2656483

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. Payback Period
2. Internal Rate of Return
3. Net Present Value
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 Ghc Frenemy 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. Ghc Frenemy shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.




Formula and Steps to Calculate Net Present Value (NPV) of The Indian Greenpreneur: Management of Frenemy Talent and Coopetition

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 Ghc Frenemy 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 Ghc Frenemy 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 (10008707) -10008707 - -
Year 1 3453470 -6555237 3453470 0.8696 3003017
Year 2 3963286 -2591951 7416756 0.7561 2996814
Year 3 3939033 1347082 11355789 0.6575 2589978
Year 4 3247850 4594932 14603639 0.5718 1856969
TOTAL 10446778


The Net NPV after 4 years is 438071

(10446778 - 10008707 )






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 (10008707) -10008707 - -
Year 1 3453470 -6555237 3453470 0.8333 2877892
Year 2 3963286 -2591951 7416756 0.6944 2752282
Year 3 3939033 1347082 11355789 0.5787 2279533
Year 4 3247850 4594932 14603639 0.4823 1566286
TOTAL 9475992


The Net NPV after 4 years is -532715

At 20% discount rate the NPV is negative (9475992 - 10008707 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ghc Frenemy 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 Ghc Frenemy has a NPV value higher than Zero then finance managers at Ghc Frenemy 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 Ghc Frenemy, then the stock price of the Ghc Frenemy 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 Ghc Frenemy 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 will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

Understanding of risks involved in the project.

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

Jyotsna Bhatnagar, Neha Paliwal Sharma, Nakul Gupta (2018), "The Indian Greenpreneur: Management of Frenemy Talent and Coopetition Harvard Business Review Case Study. Published by HBR Publications.