U-Haul: Reputation Management 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 U-Haul: Reputation Management case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. U-Haul: Reputation Management case study is a Harvard Business School (HBR) case study written by Amy J. Hillman, Donald Lange. The U-Haul: Reputation Management (referred as “Haul's Murder” 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, Public relations.

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 U-Haul: Reputation Management Case Study

In 2014, U-Haul International Ltd. (U-Haul) was the biggest North American company in do-it-yourself moving and storage. A publicly-traded but family-controlled firm, U-Haul's corporate performance was very strong. However, the company continued to be plagued by reputation-related challenges stemming from long-ago family feuds that had been made public. Just when the feuds were settling, the company's executive vice-president learned that a television series planned to air an episode profiling the murder of a member of the family. The murder took place in 1990, and the killer was arrested, but the case was controversial. Such a program detailing the murder might create new challenges for U-Haul's reputation. How should the company respond to this planned television episode? How much of the past still affected U-Haul's reputation, and how much of the reputation still affected U-Haul's relationships with employees, customers, suppliers, and investors? Should the company hope the renewed attention would blow over or should it set out to influence its public relationships? Amy J. Hillman is affiliated with Arizona State University. Donald Lange is affiliated with Arizona State University.

Case Authors : Amy J. Hillman, Donald Lange

Topic : Leadership & Managing People

Related Areas : Public relations

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Calculating Net Present Value (NPV) at 6% for U-Haul: Reputation Management Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020167)	-10020167	-	-
Year 1	3471873	-6548294	3471873	0.9434	3275352
Year 2	3961559	-2586735	7433432	0.89	3525773
Year 3	3943382	1356647	11376814	0.8396	3310940
Year 4	3239863	4596510	14616677	0.7921	2566275
TOTAL			14616677		12678340

The Net Present Value at 6% discount rate is 2658173

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. Profitability Index
3. Net Present Value
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 Haul's Murder 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. Haul's Murder 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 U-Haul: Reputation Management

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 Haul's Murder 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 Haul's Murder 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	(10020167)	-10020167	-	-
Year 1	3471873	-6548294	3471873	0.8696	3019020
Year 2	3961559	-2586735	7433432	0.7561	2995508
Year 3	3943382	1356647	11376814	0.6575	2592838
Year 4	3239863	4596510	14616677	0.5718	1852402
TOTAL					10459768

The Net NPV after 4 years is 439601

(10459768 - 10020167 )

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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	(10020167)	-10020167	-	-
Year 1	3471873	-6548294	3471873	0.8333	2893228
Year 2	3961559	-2586735	7433432	0.6944	2751083
Year 3	3943382	1356647	11376814	0.5787	2282050
Year 4	3239863	4596510	14616677	0.4823	1562434
TOTAL					9488794

The Net NPV after 4 years is -531373

At 20% discount rate the NPV is negative (9488794 - 10020167 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Haul's Murder 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 Haul's Murder has a NPV value higher than Zero then finance managers at Haul's Murder 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 Haul's Murder, then the stock price of the Haul's Murder 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 Haul's Murder 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 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 will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

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.

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 U-Haul: Reputation Management

References & Further Readings

Amy J. Hillman, Donald Lange (2018), "U-Haul: Reputation Management Harvard Business Review Case Study. Published by HBR Publications.