Someone to watch over me: The integration of privacy and corporate social responsibility 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 Someone to watch over me: The integration of privacy and corporate social responsibility case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Someone to watch over me: The integration of privacy and corporate social responsibility case study is a Harvard Business School (HBR) case study written by Alexis M. Allen, John Peloza. The Someone to watch over me: The integration of privacy and corporate social responsibility (referred as “Privacy Csr” 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, Security & privacy, Social responsibility.

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 Someone to watch over me: The integration of privacy and corporate social responsibility Case Study

Firms' relationships with key stakeholders are increasingly threatened by privacy concerns. Given the role of firm corporate social responsibility (CSR) initiatives in strengthening and enhancing these relationships, this article examines the intersection between privacy issues and CSR activities, and creates a framework for assessing privacy-related activities as an element of broader CSR strategy. Specifically, the present research considers a firm versus customer focus in privacy-related activities, as well as privacy-related activities in the form of business practices versus goods and services. We identify four areas of overlap between CSR and privacy. We highlight the potential opportunities to better manage privacy-related issues of stakeholders, and integrate these concerns into the broader CSR agenda.

Case Authors : Alexis M. Allen, John Peloza

Topic : Leadership & Managing People

Related Areas : Security & privacy, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Someone to watch over me: The integration of privacy and corporate social responsibility Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019300)	-10019300	-	-
Year 1	3466658	-6552642	3466658	0.9434	3270432
Year 2	3982283	-2570359	7448941	0.89	3544218
Year 3	3947174	1376815	11396115	0.8396	3314123
Year 4	3225164	4601979	14621279	0.7921	2554632
TOTAL			14621279		12683405

The Net Present Value at 6% discount rate is 2664105

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. Payback Period
2. Internal Rate of Return
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. Privacy Csr 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 Privacy Csr 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 Someone to watch over me: The integration of privacy and corporate social responsibility

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 Privacy Csr 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 Privacy Csr 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	(10019300)	-10019300	-	-
Year 1	3466658	-6552642	3466658	0.8696	3014485
Year 2	3982283	-2570359	7448941	0.7561	3011178
Year 3	3947174	1376815	11396115	0.6575	2595331
Year 4	3225164	4601979	14621279	0.5718	1843998
TOTAL					10464992

The Net NPV after 4 years is 445692

(10464992 - 10019300 )

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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	(10019300)	-10019300	-	-
Year 1	3466658	-6552642	3466658	0.8333	2888882
Year 2	3982283	-2570359	7448941	0.6944	2765474
Year 3	3947174	1376815	11396115	0.5787	2284244
Year 4	3225164	4601979	14621279	0.4823	1555345
TOTAL					9493945

The Net NPV after 4 years is -525355

At 20% discount rate the NPV is negative (9493945 - 10019300 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Privacy Csr 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 Privacy Csr has a NPV value higher than Zero then finance managers at Privacy Csr 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 Privacy Csr, then the stock price of the Privacy Csr 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 Privacy Csr 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 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 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 Someone to watch over me: The integration of privacy and corporate social responsibility

References & Further Readings

Alexis M. Allen, John Peloza (2018), "Someone to watch over me: The integration of privacy and corporate social responsibility Harvard Business Review Case Study. Published by HBR Publications.