On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr. 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 On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr. case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr. case study is a Harvard Business School (HBR) case study written by Catherine M. Dalton. The On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr. (referred as “Fedex Graf” 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.

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 On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr. Case Study

Alan B. Graf, Jr., is executive vice-president and chief financial officer at FedEx Corp. FedEx Corp. is comprised of multiple operating companies, with the core companies being FedEx Express, FedEx Ground, FedEx Freight, and FedEx Kinko's. Collectively, FedEx provides transportation, e-commerce, and business services globally. The Memphis, Tennessee-based corporation moves more than 5.5 million packages daily, serving more than 215 countries and territories. The corporation is comprised of more than 250,000 employees and contractors worldwide and maintains approximately 663 aircraft and over 71,000 ground vehicles. Graf joined FedEx Express, the predecessor to FedEx Corp., in 1980 as a senior financial analyst and has held a variety of management positions in the Finance division during his tenure with FedEx. His current responsibilities involve oversight of corporate global financial functions, including financial planning, treasury, tax, accounting and controls, internal audit, and corporate development. Graf is responsible for the financial activities of the corporation's core operating companies and also serves on FedEx Corp.'s Executive Committee, which is charged with the planning and implementation of FedEx Corp.'s strategic business activities. A native of Indiana, Graf graduated from the Kelley School of Business, Indiana University, with both a bachelor's and Master of Business Administration degree. He remains active with the Kelley School of Business, where he serves on the Dean's Advisory Council and was honored with membership in the Academy of Alumni Fellows in 2004. Graf holds three board memberships that include NIKE, Inc., Kimball International, Inc., and Mid-America Apartment Communities, Inc. He also serves on the Advisory Board for the University of Memphis Tiger Cubs.

Case Authors : Catherine M. Dalton

Topic : Leadership & Managing People

Related Areas : Leadership

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Calculating Net Present Value (NPV) at 6% for On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr. Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020471)	-10020471	-	-
Year 1	3445042	-6575429	3445042	0.9434	3250040
Year 2	3964941	-2610488	7409983	0.89	3528783
Year 3	3950304	1339816	11360287	0.8396	3316751
Year 4	3230499	4570315	14590786	0.7921	2558858
TOTAL			14590786		12654432

The Net Present Value at 6% discount rate is 2633961

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. Profitability Index
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 Fedex Graf 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. Fedex Graf 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 On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr.

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 Fedex Graf 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 Fedex Graf 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	(10020471)	-10020471	-	-
Year 1	3445042	-6575429	3445042	0.8696	2995689
Year 2	3964941	-2610488	7409983	0.7561	2998065
Year 3	3950304	1339816	11360287	0.6575	2597389
Year 4	3230499	4570315	14590786	0.5718	1847048
TOTAL					10438191

The Net NPV after 4 years is 417720

(10438191 - 10020471 )

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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	(10020471)	-10020471	-	-
Year 1	3445042	-6575429	3445042	0.8333	2870868
Year 2	3964941	-2610488	7409983	0.6944	2753431
Year 3	3950304	1339816	11360287	0.5787	2286056
Year 4	3230499	4570315	14590786	0.4823	1557918
TOTAL					9468273

The Net NPV after 4 years is -552198

At 20% discount rate the NPV is negative (9468273 - 10020471 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Fedex Graf 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 Fedex Graf has a NPV value higher than Zero then finance managers at Fedex Graf 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 Fedex Graf, then the stock price of the Fedex Graf 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 Fedex Graf 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 –

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 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.

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 On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr.

References & Further Readings

Catherine M. Dalton (2018), "On Time, All of the Time: An Interview with FedEx Corp.'s Alan B. Graf, Jr. Harvard Business Review Case Study. Published by HBR Publications.