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The Miami Project to Cure Paralysis 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 Miami Project to Cure Paralysis case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Miami Project to Cure Paralysis case study is a Harvard Business School (HBR) case study written by Robert Steven Kaplan, Christopher Marquis, Brent Kazan. The The Miami Project to Cure Paralysis (referred as “Miami Marc” 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, Leadership, Organizational structure, 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 Miami Project to Cure Paralysis Case Study


Marc Buoniconti is the co-founder of the Miami Project to Cure Paralysis, a nonprofit medical research organization. The project was founded in 1985 by Marc and his father Nick, a former Hall of Fame football player, when Marc suffered a spinal cord injury. In 2007, Marc was still confined to a wheelchair, but the Miami project had developed into the world's largest spinal cord injury research and treatment center. It had 250 employees, operated from a $37 million state of the art facility located on the University of Miami Miller School of Medicine campus, and had raised in excess of $275 million since its inception. However, there was still no cure for spinal cord injury, and many of the project's supporters were becoming anxious for a substantial clinical breakthrough. Fundraising was always a concern, particularly as government spending on research was declining. Marc and his father were keenly aware of the challenge of maintaining the enthusiasm and financial backing of the Miami Project's supporters. Yet they needed to avoid over-promising regarding the likelihood of potential breakthroughs, which required painstaking research and stringent clinical trials. The leadership also questioned whether the mission should remain focused on spinal cord injury, or whether it should broaden to include brain trauma and other neurodegenerative diseases such as Alzheimer's and Parkinson's. Case provides an opportunity to discuss the challenges of non-profit management, medical research, and to debate appropriate strategy for the Miami Project in 2007.


Case Authors : Robert Steven Kaplan, Christopher Marquis, Brent Kazan

Topic : Leadership & Managing People

Related Areas : Leadership, Organizational structure, Strategy




Calculating Net Present Value (NPV) at 6% for The Miami Project to Cure Paralysis Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10023871) -10023871 - -
Year 1 3472931 -6550940 3472931 0.9434 3276350
Year 2 3959012 -2591928 7431943 0.89 3523507
Year 3 3960918 1368990 11392861 0.8396 3325663
Year 4 3248590 4617580 14641451 0.7921 2573188
TOTAL 14641451 12698707




The Net Present Value at 6% discount rate is 2674836

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. Miami Marc 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 Miami Marc 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 Miami Project to Cure Paralysis

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 Miami Marc 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 Miami Marc 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 (10023871) -10023871 - -
Year 1 3472931 -6550940 3472931 0.8696 3019940
Year 2 3959012 -2591928 7431943 0.7561 2993582
Year 3 3960918 1368990 11392861 0.6575 2604368
Year 4 3248590 4617580 14641451 0.5718 1857392
TOTAL 10475282


The Net NPV after 4 years is 451411

(10475282 - 10023871 )








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 (10023871) -10023871 - -
Year 1 3472931 -6550940 3472931 0.8333 2894109
Year 2 3959012 -2591928 7431943 0.6944 2749314
Year 3 3960918 1368990 11392861 0.5787 2292198
Year 4 3248590 4617580 14641451 0.4823 1566643
TOTAL 9502264


The Net NPV after 4 years is -521607

At 20% discount rate the NPV is negative (9502264 - 10023871 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Miami Marc 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 Miami Marc has a NPV value higher than Zero then finance managers at Miami Marc 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 Miami Marc, then the stock price of the Miami Marc 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 Miami Marc 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 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.

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 Miami Project to Cure Paralysis

References & Further Readings

Robert Steven Kaplan, Christopher Marquis, Brent Kazan (2018), "The Miami Project to Cure Paralysis Harvard Business Review Case Study. Published by HBR Publications.


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