×




Michael Boulos: A Career Derailed 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 Michael Boulos: A Career Derailed case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Michael Boulos: A Career Derailed case study is a Harvard Business School (HBR) case study written by Gerard Seijts, Kanina Blanchard. The Michael Boulos: A Career Derailed (referred as “Automotive Boulos” 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, Professional transitions.

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 Michael Boulos: A Career Derailed Case Study


On July 16, 2014, the finance manager of the Powertrain Department in the Whitby, Ontario branch of Astra Automotive, a global automotive parts manufacturer, was summoned to a meeting. He had been with the company for 11 years, steadily rising through the ranks because of his analytical capabilities, grasp of business complexities and intense work ethic. He was ambitious and driven to succeed; as a result, he was sometimes perceived as unnecessarily harsh and somewhat disrespectful toward colleagues and those under him when mistakes were made. He had been in his present role for just over a year, and though the company was pleased with his results, they were insistent that he enrol in training to help him better lead his department and staff. Overcome with preparing for a major presentation, he neglected to do so. As a result, he was suspended with pay for one week for allegedly not treating a colleague with respect. Now, his director, the Canadian president of operations and the human resources manager were waiting to give him the bad news: he was being fired.


Case Authors : Gerard Seijts, Kanina Blanchard

Topic : Leadership & Managing People

Related Areas : Professional transitions




Calculating Net Present Value (NPV) at 6% for Michael Boulos: A Career Derailed Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10004260) -10004260 - -
Year 1 3459521 -6544739 3459521 0.9434 3263699
Year 2 3974782 -2569957 7434303 0.89 3537542
Year 3 3974918 1404961 11409221 0.8396 3337418
Year 4 3226088 4631049 14635309 0.7921 2555364
TOTAL 14635309 12694023




The Net Present Value at 6% discount rate is 2689763

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. Internal Rate of Return
3. Payback Period
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. Timing of the expected cash flows – stockholders of Automotive Boulos 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. Automotive Boulos 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 Michael Boulos: A Career Derailed

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 Automotive Boulos 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 Automotive Boulos 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 (10004260) -10004260 - -
Year 1 3459521 -6544739 3459521 0.8696 3008279
Year 2 3974782 -2569957 7434303 0.7561 3005506
Year 3 3974918 1404961 11409221 0.6575 2613573
Year 4 3226088 4631049 14635309 0.5718 1844526
TOTAL 10471885


The Net NPV after 4 years is 467625

(10471885 - 10004260 )








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 (10004260) -10004260 - -
Year 1 3459521 -6544739 3459521 0.8333 2882934
Year 2 3974782 -2569957 7434303 0.6944 2760265
Year 3 3974918 1404961 11409221 0.5787 2300300
Year 4 3226088 4631049 14635309 0.4823 1555791
TOTAL 9499290


The Net NPV after 4 years is -504970

At 20% discount rate the NPV is negative (9499290 - 10004260 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Automotive Boulos 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 Automotive Boulos has a NPV value higher than Zero then finance managers at Automotive Boulos 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 Automotive Boulos, then the stock price of the Automotive Boulos 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 Automotive Boulos 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 Michael Boulos: A Career Derailed

References & Further Readings

Gerard Seijts, Kanina Blanchard (2018), "Michael Boulos: A Career Derailed Harvard Business Review Case Study. Published by HBR Publications.


Royal Prima SWOT Analysis / TOWS Matrix

Healthcare , Healthcare Facilities


Juventus SWOT Analysis / TOWS Matrix

Services , Recreational Activities


Solocal SWOT Analysis / TOWS Matrix

Technology , Computer Services


Aurelius SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


TianJin 712 SWOT Analysis / TOWS Matrix

Technology , Communications Equipment


Alupar Unt SWOT Analysis / TOWS Matrix

Utilities , Electric Utilities


Hailu Heavy A SWOT Analysis / TOWS Matrix

Capital Goods , Constr. - Supplies & Fixtures


Newzulu SWOT Analysis / TOWS Matrix

Technology , Computer Services