Faith and Work: Hobby Lobby and AutoZone 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 Faith and Work: Hobby Lobby and AutoZone case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Faith and Work: Hobby Lobby and AutoZone case study is a Harvard Business School (HBR) case study written by Timothy Ewest, David M Miller, Kacee Garner, Holly Huser. The Faith and Work: Hobby Lobby and AutoZone (referred as “Wartburg Autozone” 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

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Case Description of Faith and Work: Hobby Lobby and AutoZone Case Study

Religion in the workplace is of growing interest as more individuals desire to express their spirituality and incorporate their whole selves there. Expression can take a variety of forms as employees and employers attempt to integrate their personal beliefs into their daily work.This case considers two organizational sides of integrating faith into the workplace: the employee and employer perspectives. The first part of the case takes the perspective of the owner of Hobby Lobby, a privately held arts and crafts company whose founder has always endeavoured to incorporate his Christian beliefs within business practices. The company must react to changes imposed by the Affordable Care Act of 2010 that it perceives as contrary to its values. The second part of the case considers religious discrimination experienced by an employee of AutoZone, a distributor and retailer of automobile parts. What is the place of religion in the workplace? How important is it for organizations to adapt to various forms of religious expression? Timothy Ewest is affiliated with Wartburg College. David W. Miller is affiliated with Princeton University. Kacee Garner is affiliated with Wartburg College. Holly Huser is affiliated with Wartburg College.

Case Authors : Timothy Ewest, David M Miller, Kacee Garner, Holly Huser

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Faith and Work: Hobby Lobby and AutoZone Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10022916)	-10022916	-	-
Year 1	3447738	-6575178	3447738	0.9434	3252583
Year 2	3963530	-2611648	7411268	0.89	3527528
Year 3	3961563	1349915	11372831	0.8396	3326205
Year 4	3225090	4575005	14597921	0.7921	2554573
TOTAL			14597921		12660889

The Net Present Value at 6% discount rate is 2637973

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. Net Present Value
2. Payback Period
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. Timing of the expected cash flows – stockholders of Wartburg Autozone 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. Wartburg Autozone 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 Faith and Work: Hobby Lobby and AutoZone

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 Wartburg Autozone 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 Wartburg Autozone 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	(10022916)	-10022916	-	-
Year 1	3447738	-6575178	3447738	0.8696	2998033
Year 2	3963530	-2611648	7411268	0.7561	2996998
Year 3	3961563	1349915	11372831	0.6575	2604792
Year 4	3225090	4575005	14597921	0.5718	1843956
TOTAL					10443779

The Net NPV after 4 years is 420863

(10443779 - 10022916 )

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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	(10022916)	-10022916	-	-
Year 1	3447738	-6575178	3447738	0.8333	2873115
Year 2	3963530	-2611648	7411268	0.6944	2752451
Year 3	3961563	1349915	11372831	0.5787	2292571
Year 4	3225090	4575005	14597921	0.4823	1555310
TOTAL					9473447

The Net NPV after 4 years is -549469

At 20% discount rate the NPV is negative (9473447 - 10022916 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Wartburg Autozone 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 Wartburg Autozone has a NPV value higher than Zero then finance managers at Wartburg Autozone 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 Wartburg Autozone, then the stock price of the Wartburg Autozone 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 Wartburg Autozone 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 can impact the cash flow of the project.

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.

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 Faith and Work: Hobby Lobby and AutoZone

References & Further Readings

Timothy Ewest, David M Miller, Kacee Garner, Holly Huser (2018), "Faith and Work: Hobby Lobby and AutoZone Harvard Business Review Case Study. Published by HBR Publications.