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The Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation 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 Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation case study is a Harvard Business School (HBR) case study written by Robert C. Wolcott, Alex Hurd, Stephanie Wolcott. The The Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation (referred as “Vun Hiv” 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, Health, Leadership, Policy, Social enterprise, Social responsibility.

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 Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation Case Study


In January 2005 Dr. Mean Chhi Vun, director of the Cambodian National Center for HIV/AIDS, Dermatology and STDs (NCHADS), needed to decide how to control the spread of HIV/AIDS and save the lives of thousands of Cambodians who were dying from it each year. In the seven years since Dr. Vun had been appointed director, NCHADS had built an organization that was transparent and efficient, had implemented a nationwide 100 percent condom use program, had established a system that allowed individuals to voluntarily seek confidential counseling and testing, and had instituted a set of guidelines and procedures for staff at health facilities to refer HIV-positive patients to treatment clinics and link them with NGOs providing financial and psychosocial support. Now, however, Dr. Vun faced decisions about three initiatives that were critical to expanding care and treatment programs in his country. First, he needed to decide how to quickly and cost-effectively improve the national HIV/AIDS laboratory support infrastructure. Second, Dr. Vun needed to improve logistics and supply management in order to get the best prices and ensure patients had access to life-saving medicines. Finally, he needed to figure out how to provide sustainable care and treatment to the thousands of Cambodian children living with HIV/AIDS.


Case Authors : Robert C. Wolcott, Alex Hurd, Stephanie Wolcott

Topic : Leadership & Managing People

Related Areas : Health, Leadership, Policy, Social enterprise, Social responsibility




Calculating Net Present Value (NPV) at 6% for The Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10005718) -10005718 - -
Year 1 3453275 -6552443 3453275 0.9434 3257807
Year 2 3974393 -2578050 7427668 0.89 3537196
Year 3 3971399 1393349 11399067 0.8396 3334463
Year 4 3242786 4636135 14641853 0.7921 2568590
TOTAL 14641853 12698056




The Net Present Value at 6% discount rate is 2692338

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. Net Present Value
3. Profitability Index
4. Internal Rate of Return

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. Vun Hiv 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 Vun Hiv 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 The Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation

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 Vun Hiv 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 Vun Hiv 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 (10005718) -10005718 - -
Year 1 3453275 -6552443 3453275 0.8696 3002848
Year 2 3974393 -2578050 7427668 0.7561 3005212
Year 3 3971399 1393349 11399067 0.6575 2611259
Year 4 3242786 4636135 14641853 0.5718 1854073
TOTAL 10473393


The Net NPV after 4 years is 467675

(10473393 - 10005718 )








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 (10005718) -10005718 - -
Year 1 3453275 -6552443 3453275 0.8333 2877729
Year 2 3974393 -2578050 7427668 0.6944 2759995
Year 3 3971399 1393349 11399067 0.5787 2298263
Year 4 3242786 4636135 14641853 0.4823 1563844
TOTAL 9499831


The Net NPV after 4 years is -505887

At 20% discount rate the NPV is negative (9499831 - 10005718 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Vun Hiv 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 Vun Hiv has a NPV value higher than Zero then finance managers at Vun Hiv 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 Vun Hiv, then the stock price of the Vun Hiv 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 Vun Hiv 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.

Understanding of risks involved in the project.

What can impact the cash flow of 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 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.






Negotiation Strategy of The Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation

References & Further Readings

Robert C. Wolcott, Alex Hurd, Stephanie Wolcott (2018), "The Cambodian National HIV/AIDS Program: Successful Scale-Up through Innovation Harvard Business Review Case Study. Published by HBR Publications.


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