×




Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators 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 Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators case study is a Harvard Business School (HBR) case study written by Kevin Young. The Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators (referred as “Lobbying Policy” 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




Case Description of Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators Case Study


Do financial sector groups act as passive policy takers, or do they 'shape' the policies to which they are subject? This article responds to this question with three arguments pertaining to the policy shaping power of the financial industry when it comes to international financial standards. First, industry groups confront a number of additional challenges when it comes to lobbying international regulatory bodies, which tend to be more opaque in their decision making and more difficult to hold accountable when they make unpopular decisions. Second, while these groups are sometimes able to shape financial regulatory policy, the extent of this influence is more partial and contingent than most depictions suggest. The third argument advanced is that since the global financial crisis, business groups have had many of their traditional lobbying tools adversely affected, making lobbying a more uphill battle than before. Financial industry groups are able to influence the governance of their own activities and act as 'policy shapers' some of the time, but are less strongly positioned in this role than many existing depictions seem to suggest.


Case Authors : Kevin Young

Topic : Leadership & Managing People

Related Areas :




Calculating Net Present Value (NPV) at 6% for Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10008397) -10008397 - -
Year 1 3451278 -6557119 3451278 0.9434 3255923
Year 2 3976239 -2580880 7427517 0.89 3538839
Year 3 3937254 1356374 11364771 0.8396 3305794
Year 4 3234688 4591062 14599459 0.7921 2562176
TOTAL 14599459 12662731


The Net Present Value at 6% discount rate is 2654334

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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Lobbying Policy 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 Lobbying Policy have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators

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 Lobbying Policy 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 Lobbying Policy 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 (10008397) -10008397 - -
Year 1 3451278 -6557119 3451278 0.8696 3001111
Year 2 3976239 -2580880 7427517 0.7561 3006608
Year 3 3937254 1356374 11364771 0.6575 2588808
Year 4 3234688 4591062 14599459 0.5718 1849443
TOTAL 10445971


The Net NPV after 4 years is 437574

(10445971 - 10008397 )






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 (10008397) -10008397 - -
Year 1 3451278 -6557119 3451278 0.8333 2876065
Year 2 3976239 -2580880 7427517 0.6944 2761277
Year 3 3937254 1356374 11364771 0.5787 2278503
Year 4 3234688 4591062 14599459 0.4823 1559938
TOTAL 9475784


The Net NPV after 4 years is -532613

At 20% discount rate the NPV is negative (9475784 - 10008397 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Lobbying Policy 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 Lobbying Policy has a NPV value higher than Zero then finance managers at Lobbying Policy 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 Lobbying Policy, then the stock price of the Lobbying Policy 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 Lobbying Policy 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 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.

Understanding of risks involved in the project.

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.

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

Kevin Young (2018), "Policy Takers or Policy Makers? The Lobbying of Global Banking Regulators Harvard Business Review Case Study. Published by HBR Publications.