×




Alta and SAIT: A Potential Private-Public Partnership 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 Alta and SAIT: A Potential Private-Public Partnership case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Alta and SAIT: A Potential Private-Public Partnership case study is a Harvard Business School (HBR) case study written by Michael Roberts, Travis Guay. The Alta and SAIT: A Potential Private-Public Partnership (referred as “Sait Alta” 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 Alta and SAIT: A Potential Private-Public Partnership Case Study


A proposed private-public partnership (P3) involves a Calgary-based private enterprise, Alta Injection Molding (Alta), the Southern Alberta Institute of Technology (SAIT) and the government of Canada. Alta has been chosen to collaborate with SAIT because it developed a unique way to generate revenue throughout its value chain. Alta's strategy towards fostering innovation revolves around a seven-step approach to turnkey innovation. In this P3, Alta would have access to the equipment, while SAIT students would gain exposure to the plastic manufacturing processes and have the opportunity to be connected to company leaders or distribution channels through Alta's large network. Considering the parties involved in this P3, significant differences exist in terms of mindsets, goals and concerns. The president of Alta is wondering whether to participate in the P3, and, if he does, what steps he should take to ensure his business remains viable while not impeding SAIT or the government's goals. Authors Michael Roberts and Travis Guay are affiliated with MacEwan University


Case Authors : Michael Roberts, Travis Guay

Topic : Leadership & Managing People

Related Areas :




Calculating Net Present Value (NPV) at 6% for Alta and SAIT: A Potential Private-Public Partnership Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10002389) -10002389 - -
Year 1 3448681 -6553708 3448681 0.9434 3253473
Year 2 3971943 -2581765 7420624 0.89 3535015
Year 3 3963203 1381438 11383827 0.8396 3327582
Year 4 3239519 4620957 14623346 0.7921 2566002
TOTAL 14623346 12682072




The Net Present Value at 6% discount rate is 2679683

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. Payback Period
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. Timing of the expected cash flows – stockholders of Sait Alta 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. Sait Alta 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 Alta and SAIT: A Potential Private-Public Partnership

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 Sait Alta 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 Sait Alta 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 (10002389) -10002389 - -
Year 1 3448681 -6553708 3448681 0.8696 2998853
Year 2 3971943 -2581765 7420624 0.7561 3003360
Year 3 3963203 1381438 11383827 0.6575 2605870
Year 4 3239519 4620957 14623346 0.5718 1852206
TOTAL 10460288


The Net NPV after 4 years is 457899

(10460288 - 10002389 )








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 (10002389) -10002389 - -
Year 1 3448681 -6553708 3448681 0.8333 2873901
Year 2 3971943 -2581765 7420624 0.6944 2758294
Year 3 3963203 1381438 11383827 0.5787 2293520
Year 4 3239519 4620957 14623346 0.4823 1562268
TOTAL 9487983


The Net NPV after 4 years is -514406

At 20% discount rate the NPV is negative (9487983 - 10002389 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Sait Alta 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 Sait Alta has a NPV value higher than Zero then finance managers at Sait Alta 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 Sait Alta, then the stock price of the Sait Alta 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 Sait Alta 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 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.

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.

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 Alta and SAIT: A Potential Private-Public Partnership

References & Further Readings

Michael Roberts, Travis Guay (2018), "Alta and SAIT: A Potential Private-Public Partnership Harvard Business Review Case Study. Published by HBR Publications.


LB-Shell PLC SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Meiwa Industry SWOT Analysis / TOWS Matrix

Consumer Cyclical , Auto & Truck Parts


Link Real Estate SWOT Analysis / TOWS Matrix

Services , Real Estate Operations


Affimed NV SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Progen Holdings Ltd SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods


Jyoti Structures SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


CS Communication SWOT Analysis / TOWS Matrix

Technology , Computer Services