Nedbank: Coaching Capabilities for Growth Strategy Execution 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 Nedbank: Coaching Capabilities for Growth Strategy Execution case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Nedbank: Coaching Capabilities for Growth Strategy Execution case study is a Harvard Business School (HBR) case study written by Caren Scheepers, Emme Kane. The Nedbank: Coaching Capabilities for Growth Strategy Execution (referred as “Nedbank Nedbank's” 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, .

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 Nedbank: Coaching Capabilities for Growth Strategy Execution Case Study

The chief executive officer of South Africa's Nedbank Ltd. contemplated the dilemma of growing the bank in a mature, competitive market within his own country, and succeeding at expanding outside South Africa's border. Nedbank's extensive investment in Ecobank, with its pan-African presence, was a risk, and required improvement of the capabilities of the leaders to execute Nedbank's strategy. To achieve this, Nedbank focused on building an internal capacity through coaching and mentoring programs for its leaders, in addition to other initiatives to enable employees to execute the bank's strategy. The chief executive officer was proud of his own innovative idea for a new product, and hoped he was setting an example for other leaders. He was equally proud that Nedbank was a values-oriented business that believed in using its influence to positively impact its community and environment. In 2014, despite positive advancements, the economic situation was grim and the chronic lack of skilled workers was a detriment to the country, and to Nedbank in particular. Could Nedbank rapidly increase its capabilities in time to meet the immediate challenges it faced as it expanded into locales where the stakes, and the risks, were higher?

Case Authors : Caren Scheepers, Emme Kane

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Nedbank: Coaching Capabilities for Growth Strategy Execution Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10029243)	-10029243	-	-
Year 1	3460059	-6569184	3460059	0.9434	3264207
Year 2	3962572	-2606612	7422631	0.89	3526675
Year 3	3969285	1362673	11391916	0.8396	3332688
Year 4	3227199	4589872	14619115	0.7921	2556244
TOTAL			14619115		12679814

The Net Present Value at 6% discount rate is 2650571

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. Net Present Value
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. Timing of the expected cash flows – stockholders of Nedbank Nedbank's 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. Nedbank Nedbank's 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 Nedbank: Coaching Capabilities for Growth Strategy Execution

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 Nedbank Nedbank's 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 Nedbank Nedbank's 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	(10029243)	-10029243	-	-
Year 1	3460059	-6569184	3460059	0.8696	3008747
Year 2	3962572	-2606612	7422631	0.7561	2996274
Year 3	3969285	1362673	11391916	0.6575	2609869
Year 4	3227199	4589872	14619115	0.5718	1845162
TOTAL					10460052

The Net NPV after 4 years is 430809

(10460052 - 10029243 )

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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	(10029243)	-10029243	-	-
Year 1	3460059	-6569184	3460059	0.8333	2883383
Year 2	3962572	-2606612	7422631	0.6944	2751786
Year 3	3969285	1362673	11391916	0.5787	2297040
Year 4	3227199	4589872	14619115	0.4823	1556327
TOTAL					9488535

The Net NPV after 4 years is -540708

At 20% discount rate the NPV is negative (9488535 - 10029243 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nedbank Nedbank's 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 Nedbank Nedbank's has a NPV value higher than Zero then finance managers at Nedbank Nedbank's 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 Nedbank Nedbank's, then the stock price of the Nedbank Nedbank's 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 Nedbank Nedbank's 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 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.

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.

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 Nedbank: Coaching Capabilities for Growth Strategy Execution

References & Further Readings

Caren Scheepers, Emme Kane (2018), "Nedbank: Coaching Capabilities for Growth Strategy Execution Harvard Business Review Case Study. Published by HBR Publications.