When the Tone of an Email Went Wrong 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 When the Tone of an Email Went Wrong case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. When the Tone of an Email Went Wrong case study is a Harvard Business School (HBR) case study written by Mukesh Kumar, Archana Parashar, Sanjeev Prashar. The When the Tone of an Email Went Wrong (referred as “Alumna Email” 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, Market research.

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 When the Tone of an Email Went Wrong Case Study

A tense situation arose in 2015 after a faculty member at the Premier School of Management in New Delhi, India, mistakenly emailed a test paper to a group email address that included the school's students, faculty, and alumni. An alumna who received the email responded to the professor using the "reply to all" option. The tone of her email was considered to be disrespectful to the professor. The professor responded by sending his own "reply to all," explaining his error to the alumna and chastising her for using a tone inappropriate for a student-to-teacher communication. The alumna apologized, but one of the students on the group email then wrote his own offensive email to the alumna. Was there a way to defuse the mounting tension and avoid a possible rift between the alumna and her former school? Mukesh Kumar is affiliated with Indian Institute of Management Raipur. Archana Parashar is affiliated with Indian Institute of Management Raipur. Sanjeev Prashar is affiliated with Indian Institute of Management Raipur.

Case Authors : Mukesh Kumar, Archana Parashar, Sanjeev Prashar

Topic : Leadership & Managing People

Related Areas : Market research

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Calculating Net Present Value (NPV) at 6% for When the Tone of an Email Went Wrong Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10006228)	-10006228	-	-
Year 1	3464789	-6541439	3464789	0.9434	3268669
Year 2	3969315	-2572124	7434104	0.89	3532676
Year 3	3937883	1365759	11371987	0.8396	3306323
Year 4	3227934	4593693	14599921	0.7921	2556826
TOTAL			14599921		12664494

The Net Present Value at 6% discount rate is 2658266

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. Net Present Value
2. Internal Rate of Return
3. Profitability Index
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Alumna Email 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 Alumna Email 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 When the Tone of an Email Went Wrong

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 Alumna Email 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 Alumna Email 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	(10006228)	-10006228	-	-
Year 1	3464789	-6541439	3464789	0.8696	3012860
Year 2	3969315	-2572124	7434104	0.7561	3001372
Year 3	3937883	1365759	11371987	0.6575	2589222
Year 4	3227934	4593693	14599921	0.5718	1845582
TOTAL					10449036

The Net NPV after 4 years is 442808

(10449036 - 10006228 )

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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	(10006228)	-10006228	-	-
Year 1	3464789	-6541439	3464789	0.8333	2887324
Year 2	3969315	-2572124	7434104	0.6944	2756469
Year 3	3937883	1365759	11371987	0.5787	2278867
Year 4	3227934	4593693	14599921	0.4823	1556681
TOTAL					9479342

The Net NPV after 4 years is -526886

At 20% discount rate the NPV is negative (9479342 - 10006228 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Alumna Email 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 Alumna Email has a NPV value higher than Zero then finance managers at Alumna Email 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 Alumna Email, then the stock price of the Alumna Email 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 Alumna Email 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 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 When the Tone of an Email Went Wrong

References & Further Readings

Mukesh Kumar, Archana Parashar, Sanjeev Prashar (2018), "When the Tone of an Email Went Wrong Harvard Business Review Case Study. Published by HBR Publications.