Canada's Aboriginal People: Idle No More 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 Canada's Aboriginal People: Idle No More case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Canada's Aboriginal People: Idle No More case study is a Harvard Business School (HBR) case study written by Gerard Seijts, Jana Seijts, Paul Bigus. The Canada's Aboriginal People: Idle No More (referred as “Aboriginal Idle” 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, Social platforms.

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 Canada's Aboriginal People: Idle No More Case Study

The relationship between Aboriginal peoples and the Canadian government has been characterized by conflict and change. Although the Conservative government seemed to support Aboriginal objectives when it issued an historic apology in 2007 for the abuses suffered under the residential schools program and signed the United Nations Declaration on the Rights of Indigenous People in 2008, it included changes to the Indian Act in its 2012 omnibus Bill C-45 that put economic development ahead of environmental protection and violated numerous First Nations treaties. In response, a group of First Nations activists initiated the Idle No More movement, which used social media to organize demonstrations around the country, including teach-ins, flash mob round dances and blockades of major transportation routes. Although supported by many non-Aboriginal environmental and human rights groups both in Canada and abroad, the movement appeared to lose steam after the prime minister met Aboriginal leaders to outline eight key items of consensus for action to address Aboriginal and treaty rights, health care, education and employment issues and Chief Theresa Spence suspended the hunger strike that had galvanized support. How could Idle No More organizers maintain the momentum and awareness they had worked so hard to achieve?

Case Authors : Gerard Seijts, Jana Seijts, Paul Bigus

Topic : Leadership & Managing People

Related Areas : Leadership, Social platforms

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Calculating Net Present Value (NPV) at 6% for Canada's Aboriginal People: Idle No More Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10023118)	-10023118	-	-
Year 1	3452105	-6571013	3452105	0.9434	3256703
Year 2	3959421	-2611592	7411526	0.89	3523871
Year 3	3938488	1326896	11350014	0.8396	3306830
Year 4	3247827	4574723	14597841	0.7921	2572583
TOTAL			14597841		12659987

The Net Present Value at 6% discount rate is 2636869

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. Profitability Index
2. Net Present Value
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. Timing of the expected cash flows – stockholders of Aboriginal Idle 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. Aboriginal Idle 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 Canada's Aboriginal People: Idle No More

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 Aboriginal Idle 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 Aboriginal Idle 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	(10023118)	-10023118	-	-
Year 1	3452105	-6571013	3452105	0.8696	3001830
Year 2	3959421	-2611592	7411526	0.7561	2993891
Year 3	3938488	1326896	11350014	0.6575	2589620
Year 4	3247827	4574723	14597841	0.5718	1856956
TOTAL					10442297

The Net NPV after 4 years is 419179

(10442297 - 10023118 )

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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	(10023118)	-10023118	-	-
Year 1	3452105	-6571013	3452105	0.8333	2876754
Year 2	3959421	-2611592	7411526	0.6944	2749598
Year 3	3938488	1326896	11350014	0.5787	2279218
Year 4	3247827	4574723	14597841	0.4823	1566275
TOTAL					9471844

The Net NPV after 4 years is -551274

At 20% discount rate the NPV is negative (9471844 - 10023118 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Aboriginal Idle 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 Aboriginal Idle has a NPV value higher than Zero then finance managers at Aboriginal Idle 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 Aboriginal Idle, then the stock price of the Aboriginal Idle 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 Aboriginal Idle 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 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 can impact the cash flow of 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.

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Negotiation Strategy of Canada's Aboriginal People: Idle No More

References & Further Readings

Gerard Seijts, Jana Seijts, Paul Bigus (2018), "Canada's Aboriginal People: Idle No More Harvard Business Review Case Study. Published by HBR Publications.