Management Control Challenges at Hadassah University Hospital-Mt. Scopus 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 Management Control Challenges at Hadassah University Hospital-Mt. Scopus case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Management Control Challenges at Hadassah University Hospital-Mt. Scopus case study is a Harvard Business School (HBR) case study written by Susan Madden, Richard B. Siegrist. The Management Control Challenges at Hadassah University Hospital-Mt. Scopus (referred as “Hadassah Scopus” 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, Organizational structure.

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 Management Control Challenges at Hadassah University Hospital-Mt. Scopus Case Study

Dr. Osnat Levtzion-Korach was the newly appointed Director of the Hadassah University Hospital-Mt. Scopus, a 350-bed academic community hospital located in the crowded, ethnically mixed neighborhood of northeastern Jerusalem. Mt. Scopus was one of two hospitals in the Hadassah Medical Organization; the larger 850-bed hospital, Ein Kerem, was located about 30 minutes away across Jerusalem. In the past, the two Hadassah hospitals had been centrally managed with the two on-site directors acting primarily as COOs. A new Director General of the system now wanted to de-centralize responsibilities, and Osnat, the first female head of a Hadassah hospital, had been promised much greater control over the finances and management of the hospital than her predecessor had enjoyed. The staff at Mt. Scopus pinned a great deal of hope on their new director to bring resources and a renewed sense of vision to the hospital, but Osnat knew her ability to do this depended in large part on her ability to manage costs as well as change a culture that had always prided itself on providing the best care but had not been held accountable for monitoring expenses or budgets.

Case Authors : Susan Madden, Richard B. Siegrist

Topic : Leadership & Managing People

Related Areas : Organizational structure

Calculating Net Present Value (NPV) at 6% for Management Control Challenges at Hadassah University Hospital-Mt. Scopus Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10024863) -10024863 - -
Year 1 3467226 -6557637 3467226 0.9434 3270968
Year 2 3966200 -2591437 7433426 0.89 3529904
Year 3 3940257 1348820 11373683 0.8396 3308316
Year 4 3238663 4587483 14612346 0.7921 2565324
TOTAL 14612346 12674512

The Net Present Value at 6% discount rate is 2649649

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. Net Present Value
2. Profitability Index
3. Internal Rate of Return
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. Hadassah Scopus 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 Hadassah Scopus 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 Management Control Challenges at Hadassah University Hospital-Mt. Scopus

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 Hadassah Scopus 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 Hadassah Scopus 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 %
Cash Flows
Year 0 (10024863) -10024863 - -
Year 1 3467226 -6557637 3467226 0.8696 3014979
Year 2 3966200 -2591437 7433426 0.7561 2999017
Year 3 3940257 1348820 11373683 0.6575 2590783
Year 4 3238663 4587483 14612346 0.5718 1851716
TOTAL 10456495

The Net NPV after 4 years is 431632

(10456495 - 10024863 )

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 %
Cash Flows
Year 0 (10024863) -10024863 - -
Year 1 3467226 -6557637 3467226 0.8333 2889355
Year 2 3966200 -2591437 7433426 0.6944 2754306
Year 3 3940257 1348820 11373683 0.5787 2280241
Year 4 3238663 4587483 14612346 0.4823 1561855
TOTAL 9485757

The Net NPV after 4 years is -539106

At 20% discount rate the NPV is negative (9485757 - 10024863 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Hadassah Scopus 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 Hadassah Scopus has a NPV value higher than Zero then finance managers at Hadassah Scopus 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 Hadassah Scopus, then the stock price of the Hadassah Scopus 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 Hadassah Scopus 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 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.

Understanding of risks involved in the project.

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.

References & Further Readings

Susan Madden, Richard B. Siegrist (2018), "Management Control Challenges at Hadassah University Hospital-Mt. Scopus Harvard Business Review Case Study. Published by HBR Publications.