Tradition and Transformation at the Spanish Riding School of Vienna 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 Tradition and Transformation at the Spanish Riding School of Vienna case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Tradition and Transformation at the Spanish Riding School of Vienna case study is a Harvard Business School (HBR) case study written by James Kennelly, Liza Nagode. The Tradition and Transformation at the Spanish Riding School of Vienna (referred as “Srs Rtler” 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, Corporate governance, Leadership, Organizational culture, Public relations, Social enterprise.

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

---

Case Description of Tradition and Transformation at the Spanish Riding School of Vienna Case Study

The Spanish Riding School (SRS) was an icon of Austrian national identity, the oldest riding school in the world and the primary exponent of the art of classical dressage (a "ballet" with horses). In 2012, 447 years after its founding, the School confronted a serious threat: how to survive its so-called "privatization" by the Austrian government. Elisabeth GA?rtler, recently reappointed to a five-year term as Managing Director needed to address three interrelated challenges: how to counter the critics of the SRS and its leadership and the avalanche of bad press they had generated, how to consolidate the significant organizational changes she had implemented during her first five years as Managing Director, and how to generate additional revenue so that the SRS would continue to breakeven financially - and in the long run, achieving financial sustainability for the SRS and preserving both its exalted status as the world's foremost institution of classical dressage and its responsibility to preserve and improve the breed of Lipizzaner horses. Since her appointment (on a 5-year contract) in December, 2007, GA?rtler had acted quickly to implement a series of initiatives aimed at reducing costs, increasing revenue, and improving organizational capabilities. While these changes appeared to be successful at staunching the SRS's financial losses, they were not without cost. Internally, a number of experienced riders had strongly resisted the changes and had been subsequently dismissed; externally, critics had initiated a media campaign claiming that the quality of the SRS's performances had declined and been "debased" as a consequence of the changes. As GA?rtler looks to her second term as Managing Director, students are asked to evaluate her organizational change efforts, and consider her strategic options going forward.

Case Authors : James Kennelly, Liza Nagode

Topic : Leadership & Managing People

Related Areas : Corporate governance, Leadership, Organizational culture, Public relations, Social enterprise

---

Calculating Net Present Value (NPV) at 6% for Tradition and Transformation at the Spanish Riding School of Vienna Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10015131)	-10015131	-	-
Year 1	3443377	-6571754	3443377	0.9434	3248469
Year 2	3970750	-2601004	7414127	0.89	3533953
Year 3	3955214	1354210	11369341	0.8396	3320874
Year 4	3247984	4602194	14617325	0.7921	2572708
TOTAL			14617325		12676004

The Net Present Value at 6% discount rate is 2660873

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.

---

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. Internal Rate of Return
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 Srs Rtler 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. Srs Rtler shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

---

Formula and Steps to Calculate Net Present Value (NPV) of Tradition and Transformation at the Spanish Riding School of Vienna

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 Srs Rtler 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 Srs Rtler 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	(10015131)	-10015131	-	-
Year 1	3443377	-6571754	3443377	0.8696	2994241
Year 2	3970750	-2601004	7414127	0.7561	3002457
Year 3	3955214	1354210	11369341	0.6575	2600617
Year 4	3247984	4602194	14617325	0.5718	1857045
TOTAL					10454361

The Net NPV after 4 years is 439230

(10454361 - 10015131 )

---

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	(10015131)	-10015131	-	-
Year 1	3443377	-6571754	3443377	0.8333	2869481
Year 2	3970750	-2601004	7414127	0.6944	2757465
Year 3	3955214	1354210	11369341	0.5787	2288897
Year 4	3247984	4602194	14617325	0.4823	1566350
TOTAL					9482193

The Net NPV after 4 years is -532938

At 20% discount rate the NPV is negative (9482193 - 10015131 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Srs Rtler 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 Srs Rtler has a NPV value higher than Zero then finance managers at Srs Rtler 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 Srs Rtler, then the stock price of the Srs Rtler 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 Srs Rtler 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 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 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.

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.

---

Negotiation Strategy of Tradition and Transformation at the Spanish Riding School of Vienna

References & Further Readings

James Kennelly, Liza Nagode (2018), "Tradition and Transformation at the Spanish Riding School of Vienna Harvard Business Review Case Study. Published by HBR Publications.