C&F Consulting, Inc. 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 C&F Consulting, Inc. case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. C&F Consulting, Inc. case study is a Harvard Business School (HBR) case study written by Alison Konrad, Ken Mark. The C&F Consulting, Inc. (referred as “Assault Sexual” 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, Difficult conversations, Leadership, Personnel policies.

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

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Case Description of C&F Consulting, Inc. Case Study

In July 2009, C&F Consulting, Inc., based in Toronto, sends a team of five brand strategists to work with a client in China on marketing and advertising for a car brand specific to the North American market. The team, consisting of four men and one woman, often meet for dinner after their day's work, which consists of conducting a crash course in North American-style marketing for the Chinese client's cohort of new recruits. The woman feels that one of the men on the team treats her with great disrespect, bordering on sexual assault. If she brings up the issue, will all four of her male colleagues take offence? Will they gossip about her at the office and isolate her at work? What might be the impact on her career if she is perceived as anti-social or thin-skinned? How will her superiors react to her accusations? What is the definition of sexual assault in Canadian law, and can she pursue a civil case against her alleged assailant although the acts happened in a foreign country?

Case Authors : Alison Konrad, Ken Mark

Topic : Leadership & Managing People

Related Areas : Difficult conversations, Leadership, Personnel policies

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Calculating Net Present Value (NPV) at 6% for C&F Consulting, Inc. Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10029423)	-10029423	-	-
Year 1	3444054	-6585369	3444054	0.9434	3249108
Year 2	3961677	-2623692	7405731	0.89	3525878
Year 3	3960505	1336813	11366236	0.8396	3325316
Year 4	3240474	4577287	14606710	0.7921	2566759
TOTAL			14606710		12667061

The Net Present Value at 6% discount rate is 2637638

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.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Internal Rate of Return
2. Profitability Index
3. Payback Period
4. Net Present Value

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 Assault Sexual 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. Assault Sexual shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of C&F Consulting, Inc.

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 Assault Sexual 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 Assault Sexual 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	(10029423)	-10029423	-	-
Year 1	3444054	-6585369	3444054	0.8696	2994830
Year 2	3961677	-2623692	7405731	0.7561	2995597
Year 3	3960505	1336813	11366236	0.6575	2604096
Year 4	3240474	4577287	14606710	0.5718	1852752
TOTAL					10447274

The Net NPV after 4 years is 417851

(10447274 - 10029423 )

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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	(10029423)	-10029423	-	-
Year 1	3444054	-6585369	3444054	0.8333	2870045
Year 2	3961677	-2623692	7405731	0.6944	2751165
Year 3	3960505	1336813	11366236	0.5787	2291959
Year 4	3240474	4577287	14606710	0.4823	1562729
TOTAL					9475897

The Net NPV after 4 years is -553526

At 20% discount rate the NPV is negative (9475897 - 10029423 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Assault Sexual 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 Assault Sexual has a NPV value higher than Zero then finance managers at Assault Sexual 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 Assault Sexual, then the stock price of the Assault Sexual 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 Assault Sexual 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 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.

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.

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Negotiation Strategy of C&F Consulting, Inc.

References & Further Readings

Alison Konrad, Ken Mark (2018), "C&F Consulting, Inc. Harvard Business Review Case Study. Published by HBR Publications.