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Carla Ann Harris at Morgan Stanley 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 Carla Ann Harris at Morgan Stanley case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Carla Ann Harris at Morgan Stanley case study is a Harvard Business School (HBR) case study written by Lakshmi Ramarajan, Alex Radu. The Carla Ann Harris at Morgan Stanley (referred as “Harris Carla” 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, Gender, Leadership, Organizational culture.

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 Carla Ann Harris at Morgan Stanley Case Study


This case follows Carla Ann Harris, an African-American executive on Wall Street, from her childhood to the eve of her 20th year at Morgan Stanley. In addition to her professional identity as an investment banker, Harris is also an accomplished gospel singer, an observant Catholic, a philanthropist, a public speaker, and a writer. Along with her successes and accomplishments, she has also faced setbacks and challenges. Despite the negative experiences African-American women face on Wall Street, Harris feels she has been successful because she "brings her authentic self to the table." A unique aspect of Harris' story is that throughout her journey she nourishes other aspects of her identity, such as her singing, her devotion to her faith, and her desire to help others-a difficult feat in the financial services industry given the culture of long hours, competitiveness, and cynicism. The case ends with a career decision: Harris must decide whether to start an ambitious program for emerging female and minority asset managers (the Emerging Manager Program or EMP). The program represents a way to bring together her professional expertise and personal passion to help people thrive in their work, but like all entrepreneurial ventures it has associated risks. The case helps students to understand how one's own identities are central to one's career development, relationship building, and professional growth; to consider how maintaining unique aspects of oneself can help people succeed in a challenging organizational culture; and to provide a forum for discussing issues of race and gender in a profession in which there are few minorities and women at senior levels.


Case Authors : Lakshmi Ramarajan, Alex Radu

Topic : Leadership & Managing People

Related Areas : Gender, Leadership, Organizational culture




Calculating Net Present Value (NPV) at 6% for Carla Ann Harris at Morgan Stanley Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10014617) -10014617 - -
Year 1 3450681 -6563936 3450681 0.9434 3255359
Year 2 3968842 -2595094 7419523 0.89 3532255
Year 3 3962775 1367681 11382298 0.8396 3327222
Year 4 3248761 4616442 14631059 0.7921 2573323
TOTAL 14631059 12688160




The Net Present Value at 6% discount rate is 2673543

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Harris Carla 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 Harris Carla have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Carla Ann Harris at Morgan Stanley

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 Harris Carla 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 Harris Carla 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 (10014617) -10014617 - -
Year 1 3450681 -6563936 3450681 0.8696 3000592
Year 2 3968842 -2595094 7419523 0.7561 3001015
Year 3 3962775 1367681 11382298 0.6575 2605589
Year 4 3248761 4616442 14631059 0.5718 1857490
TOTAL 10464685


The Net NPV after 4 years is 450068

(10464685 - 10014617 )








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 (10014617) -10014617 - -
Year 1 3450681 -6563936 3450681 0.8333 2875568
Year 2 3968842 -2595094 7419523 0.6944 2756140
Year 3 3962775 1367681 11382298 0.5787 2293273
Year 4 3248761 4616442 14631059 0.4823 1566725
TOTAL 9491705


The Net NPV after 4 years is -522912

At 20% discount rate the NPV is negative (9491705 - 10014617 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Harris Carla 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 Harris Carla has a NPV value higher than Zero then finance managers at Harris Carla 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 Harris Carla, then the stock price of the Harris Carla 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 Harris Carla 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 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 will be a multi year spillover effect of various taxation regulations.

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.

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 Carla Ann Harris at Morgan Stanley

References & Further Readings

Lakshmi Ramarajan, Alex Radu (2018), "Carla Ann Harris at Morgan Stanley Harvard Business Review Case Study. Published by HBR Publications.


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