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Improving Analytics Capabilities Through Crowdsourcing 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 Improving Analytics Capabilities Through Crowdsourcing case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Improving Analytics Capabilities Through Crowdsourcing case study is a Harvard Business School (HBR) case study written by Joseph Byrum, Alpheus Bingham. The Improving Analytics Capabilities Through Crowdsourcing (referred as “Syngenta Breeding” 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






Case Description of Improving Analytics Capabilities Through Crowdsourcing Case Study


This is an MIT Sloan Management Review article. How does a company operating outside the major technology talent centers gain access to the most innovative data scientists that money can buy? Assuming you can't recruit the right data analysts to join your team full time, how do you tap into contractors with the knowledge and creativity you need outside your technical core? This was the predicament Syngenta AG, a Basel, Switzerland-based agrochemical and seed company formed by the merger of the agribusiness units of Novartis and AstraZeneca, faced in 2008.For centuries, plant breeding has been a labor-intensive process that depended largely on trial and error. To find the most successful variety of corn, for example, a breeder might pollinate hundreds or even thousands of plants by hand to see what happened. Syngenta had been involved in a large-scale version of trial-and-error research and development, conducting field tests on hundreds of thousands of plants each year in more than 150 locations around the world. But given that the results of experiments are often shaped by quirks and idiosyncrasies, it was sometimes difficult to draw meaningful conclusions. Syngenta's idea was to use data analytics to study a wide range of plant and seed varieties so it could identify the most desirable plants early and make optimal use of resources (everything from capital to labor to land to time). Rather than investing time and resources on more and more testing, its aim was to make decisions about plant portfolios using hard data and science. The vision, write authors Joseph Byrum and Alpheus Bingham, "was to create a suite of software tools that would replace intuition in plant breeding with data-backed science." The authors describe how open innovation can help companies tackle complex business problems that they can't solve on their own. They also discuss lessons Syngenta learned as the company turned to several online crowdsourcing platforms to find talent that could help it increase its R&D efficiency. The effort paid off: Within eight years, Syngenta tripled the average annual improvement rate of its soybean portfolio. In April 2015, an independent panel of academic and business experts in operations research validated the company's efforts and their applicability beyond agriculture, awarding Syngenta the 2015 Franz Edelman Award for Achievement in Operations Research and the Management Sciences.


Case Authors : Joseph Byrum, Alpheus Bingham

Topic : Leadership & Managing People

Related Areas :




Calculating Net Present Value (NPV) at 6% for Improving Analytics Capabilities Through Crowdsourcing Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10028507) -10028507 - -
Year 1 3448419 -6580088 3448419 0.9434 3253225
Year 2 3961333 -2618755 7409752 0.89 3525572
Year 3 3950758 1332003 11360510 0.8396 3317133
Year 4 3235170 4567173 14595680 0.7921 2562558
TOTAL 14595680 12658488




The Net Present Value at 6% discount rate is 2629981

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. Profitability Index
2. Internal Rate of Return
3. Payback Period
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 Syngenta Breeding 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. Syngenta Breeding 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 Improving Analytics Capabilities Through Crowdsourcing

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 Syngenta Breeding 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 Syngenta Breeding 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 (10028507) -10028507 - -
Year 1 3448419 -6580088 3448419 0.8696 2998625
Year 2 3961333 -2618755 7409752 0.7561 2995337
Year 3 3950758 1332003 11360510 0.6575 2597688
Year 4 3235170 4567173 14595680 0.5718 1849719
TOTAL 10441369


The Net NPV after 4 years is 412862

(10441369 - 10028507 )








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 (10028507) -10028507 - -
Year 1 3448419 -6580088 3448419 0.8333 2873683
Year 2 3961333 -2618755 7409752 0.6944 2750926
Year 3 3950758 1332003 11360510 0.5787 2286318
Year 4 3235170 4567173 14595680 0.4823 1560171
TOTAL 9471097


The Net NPV after 4 years is -557410

At 20% discount rate the NPV is negative (9471097 - 10028507 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Syngenta Breeding 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 Syngenta Breeding has a NPV value higher than Zero then finance managers at Syngenta Breeding 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 Syngenta Breeding, then the stock price of the Syngenta Breeding 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 Syngenta Breeding 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.

What can impact the cash flow of the project.

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 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 Improving Analytics Capabilities Through Crowdsourcing

References & Further Readings

Joseph Byrum, Alpheus Bingham (2018), "Improving Analytics Capabilities Through Crowdsourcing Harvard Business Review Case Study. Published by HBR Publications.


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