Cheating and NASCAR: Who's at the Wheel? 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 Cheating and NASCAR: Who's at the Wheel? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Cheating and NASCAR: Who's at the Wheel? case study is a Harvard Business School (HBR) case study written by Melissa S Baucus, William I. Norton Jr., Beth Davis-Sramek, William Meek. The Cheating and NASCAR: Who's at the Wheel? (referred as “Cheating Nascar” 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, Regulation.

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 Cheating and NASCAR: Who's at the Wheel? Case Study

This article embarks on a road trip to NASCAR, the National Association for Stock Car Auto Racing, to take a close look at why cheating occurs within that organization. Two arguments drive the article, namely that NASCAR (1) may not be able to stop cheating particularly within the current context, and (2) might not want or be motivated to stop cheating. Obstacles complicating NASCAR's efforts to stop cheating include the long-standing culture of unethical behavior within stock car racing, and the inconsistent imposition of punishments by NASCAR which drivers and race teams perceive as favoritism and unfair treatment. Yellow flags that raise caution include pressure from unwavering fans, and the friction between innovation and maintaining parity among teams. Proposed solutions include changing the culture within the NASCAR community, as well as developing ethical role models, both of which require major action by NASCAR's top managers to signal the importance of ethical behavior. Other key stakeholders such as sponsors and fans must create incentives and rewards for ethical behavior, and consider reducing or ending support for drivers and teams that engage in unethical conduct. Our analysis and recommendations have broad applications because NASCAR is an archetype of a large organization attempting to reduce cheating and unethical behavior.

Case Authors : Melissa S Baucus, William I. Norton Jr., Beth Davis-Sramek, William Meek

Topic : Leadership & Managing People

Related Areas : Leadership, Regulation

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Calculating Net Present Value (NPV) at 6% for Cheating and NASCAR: Who's at the Wheel? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020688)	-10020688	-	-
Year 1	3470553	-6550135	3470553	0.9434	3274107
Year 2	3963216	-2586919	7433769	0.89	3527248
Year 3	3969570	1382651	11403339	0.8396	3332928
Year 4	3251067	4633718	14654406	0.7921	2575150
TOTAL			14654406		12709432

The Net Present Value at 6% discount rate is 2688744

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. Payback Period
3. Net Present Value
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Cheating Nascar shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Cheating Nascar have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Cheating and NASCAR: Who's at the Wheel?

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 Cheating Nascar 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 Cheating Nascar 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	(10020688)	-10020688	-	-
Year 1	3470553	-6550135	3470553	0.8696	3017872
Year 2	3963216	-2586919	7433769	0.7561	2996761
Year 3	3969570	1382651	11403339	0.6575	2610057
Year 4	3251067	4633718	14654406	0.5718	1858808
TOTAL					10483498

The Net NPV after 4 years is 462810

(10483498 - 10020688 )

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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	(10020688)	-10020688	-	-
Year 1	3470553	-6550135	3470553	0.8333	2892128
Year 2	3963216	-2586919	7433769	0.6944	2752233
Year 3	3969570	1382651	11403339	0.5787	2297205
Year 4	3251067	4633718	14654406	0.4823	1567837
TOTAL					9509403

The Net NPV after 4 years is -511285

At 20% discount rate the NPV is negative (9509403 - 10020688 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Cheating Nascar 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 Cheating Nascar has a NPV value higher than Zero then finance managers at Cheating Nascar 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 Cheating Nascar, then the stock price of the Cheating Nascar 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 Cheating Nascar 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 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.

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 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 Cheating and NASCAR: Who's at the Wheel?

References & Further Readings

Melissa S Baucus, William I. Norton Jr., Beth Davis-Sramek, William Meek (2018), "Cheating and NASCAR: Who's at the Wheel? Harvard Business Review Case Study. Published by HBR Publications.