Nedbank: Transformational Leadership in Sustainable Turnaround 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: Transformational Leadership in Sustainable Turnaround case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Nedbank: Transformational Leadership in Sustainable Turnaround case study is a Harvard Business School (HBR) case study written by Caren Scheepers, Jabu Maphalala, Chantel van der Westhuizen. The Nedbank: Transformational Leadership in Sustainable Turnaround (referred as “Nedbank Transformation” 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 transitions, Organizational culture, Succession planning.

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: Transformational Leadership in Sustainable Turnaround Case Study

In 2013, the chief executive officer of South Africa's fourth largest bank, the Nedbank Group Limited, is considering the past and future of his organization. The company is in the process of transformation from a low point in 2003 of poor staff morale and falling share prices, with the threat of losing its licence because of poor capital liquidity, to the best bank in Africa, winning praise for its efforts in environmental sustainability and promoting the post-Apartheid government's broad-based black economic empowerment policy. Through acquisitions and joint ventures, the company is expanding into neighbouring countries with the result that, after a period of retrenchment, the number of branches and staff has grown. Clearly, his and his predecessor's clear vision, measurement and focus on culture have enabled the turnaround and subsequent organizational transformation. Yet, in the midst of the global financial crisis, the company is facing increasing competition not only from other banks throughout Africa but from telecommunications companies and retailers that operate financial services. The question now is: Can these transformation efforts be sustained?

Case Authors : Caren Scheepers, Jabu Maphalala, Chantel van der Westhuizen

Topic : Leadership & Managing People

Related Areas : Leadership transitions, Organizational culture, Succession planning

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Calculating Net Present Value (NPV) at 6% for Nedbank: Transformational Leadership in Sustainable Turnaround Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10021522)	-10021522	-	-
Year 1	3469036	-6552486	3469036	0.9434	3272675
Year 2	3968861	-2583625	7437897	0.89	3532272
Year 3	3948776	1365151	11386673	0.8396	3315468
Year 4	3233192	4598343	14619865	0.7921	2560991
TOTAL			14619865		12681407

The Net Present Value at 6% discount rate is 2659885

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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Nedbank Transformation 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 Nedbank Transformation 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 Nedbank: Transformational Leadership in Sustainable Turnaround

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 Transformation 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 Transformation 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	(10021522)	-10021522	-	-
Year 1	3469036	-6552486	3469036	0.8696	3016553
Year 2	3968861	-2583625	7437897	0.7561	3001029
Year 3	3948776	1365151	11386673	0.6575	2596384
Year 4	3233192	4598343	14619865	0.5718	1848588
TOTAL					10462554

The Net NPV after 4 years is 441032

(10462554 - 10021522 )

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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	(10021522)	-10021522	-	-
Year 1	3469036	-6552486	3469036	0.8333	2890863
Year 2	3968861	-2583625	7437897	0.6944	2756153
Year 3	3948776	1365151	11386673	0.5787	2285171
Year 4	3233192	4598343	14619865	0.4823	1559217
TOTAL					9491405

The Net NPV after 4 years is -530117

At 20% discount rate the NPV is negative (9491405 - 10021522 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nedbank Transformation 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 Transformation has a NPV value higher than Zero then finance managers at Nedbank Transformation 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 Transformation, then the stock price of the Nedbank Transformation 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 Transformation 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 can impact the cash flow of 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.

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.

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: Transformational Leadership in Sustainable Turnaround

References & Further Readings

Caren Scheepers, Jabu Maphalala, Chantel van der Westhuizen (2018), "Nedbank: Transformational Leadership in Sustainable Turnaround Harvard Business Review Case Study. Published by HBR Publications.