Conflict at MRW: The New Employee's Pregnancy 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 Conflict at MRW: The New Employee's Pregnancy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Conflict at MRW: The New Employee's Pregnancy case study is a Harvard Business School (HBR) case study written by Margarita MM Marti, Adolfo AM Montalvo. The Conflict at MRW: The New Employee's Pregnancy (referred as “Pregnancy Mrw” 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, Decision making, Gender, Knowledge management.

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 Conflict at MRW: The New Employee's Pregnancy Case Study

MRW is a courier firm based in Barcelona (Spain). In 2010, it was consolidating internationalization of its business. It is against this background that the case raises a highly sensitive, emotional issue: What to do about Sonia, a recently-hired manager (still in her probationary period) who suddenly reveals that she is pregnant. Moreover, her pregnancy is a high-risk one, likely requiring an early medical leave. The new manager's post involves setting up Information Technology (IT) systems, which are vital to the firm's business, internationalization and invoicing. 'The case explores two standpoints: (1) a company weathering the economic crisis, in which it is contrary to the firm's 'belt-tightening' measures to hire a replacement for an employee on leave; (2) the company's track record in the CSR field including its promotion of opportunities for women. The case aims to create a dilemma for students. Some will defend Sonia's right to a maternity leave and to continue working in MRW, especially in the light of her trials and tribulations with fertility treatment and the fact that the pregnancy is a risky one. Others will defend the company's interests, arguing that the situation in the firm is critical and that MRW's internationalization is vital for the company's business development. The latter group will focus on Sonia's role in launching the internationalization project. The question of what to do about Sonia's pregnancy is a critical one for both the Technology Department and for Sonia. Dealing with it requires great care.

Case Authors : Margarita MM Marti, Adolfo AM Montalvo

Topic : Leadership & Managing People

Related Areas : Decision making, Gender, Knowledge management

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Calculating Net Present Value (NPV) at 6% for Conflict at MRW: The New Employee's Pregnancy Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10023738)	-10023738	-	-
Year 1	3450611	-6573127	3450611	0.9434	3255293
Year 2	3953085	-2620042	7403696	0.89	3518232
Year 3	3948476	1328434	11352172	0.8396	3315217
Year 4	3234479	4562913	14586651	0.7921	2562010
TOTAL			14586651		12650752

The Net Present Value at 6% discount rate is 2627014

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. Payback Period
2. Profitability Index
3. Net Present Value
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 Pregnancy Mrw 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. Pregnancy Mrw 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 Conflict at MRW: The New Employee's Pregnancy

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 Pregnancy Mrw 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 Pregnancy Mrw 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	(10023738)	-10023738	-	-
Year 1	3450611	-6573127	3450611	0.8696	3000531
Year 2	3953085	-2620042	7403696	0.7561	2989100
Year 3	3948476	1328434	11352172	0.6575	2596187
Year 4	3234479	4562913	14586651	0.5718	1849324
TOTAL					10435142

The Net NPV after 4 years is 411404

(10435142 - 10023738 )

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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	(10023738)	-10023738	-	-
Year 1	3450611	-6573127	3450611	0.8333	2875509
Year 2	3953085	-2620042	7403696	0.6944	2745198
Year 3	3948476	1328434	11352172	0.5787	2284998
Year 4	3234479	4562913	14586651	0.4823	1559837
TOTAL					9465542

The Net NPV after 4 years is -558196

At 20% discount rate the NPV is negative (9465542 - 10023738 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Pregnancy Mrw 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 Pregnancy Mrw has a NPV value higher than Zero then finance managers at Pregnancy Mrw 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 Pregnancy Mrw, then the stock price of the Pregnancy Mrw 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 Pregnancy Mrw 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 key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 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 Conflict at MRW: The New Employee's Pregnancy

References & Further Readings

Margarita MM Marti, Adolfo AM Montalvo (2018), "Conflict at MRW: The New Employee's Pregnancy Harvard Business Review Case Study. Published by HBR Publications.