Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA 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 Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA case study is a Harvard Business School (HBR) case study written by Stijn Viaene, Steven De Hertogh. The Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA (referred as “6 Fedex” 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 Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA Case Study

In 2003, Rob Carter, CIO of international express courier FedEx, launched the 'Six by Six' (6 A? 6) IT transformation program: a major rationalization and centralization effort to improve FedEx's IT service delivery to its business partners. This teaching case deals with the 6 A? 6 efforts made by the IT department for Europe, Middle East, Indian sub-continent and Africa (EMEA). The case focuses on two objectives of the 6 A? 6 program: (a) creating a consistent IT environment and (b) increasing delivery bandwidth to the business. Historically, FedEx Express in EMEA had granted high levels of empowerment to local business and IT people. Moreover, FedEx had always supported a 'can-do' mentality in both business and IT people. Consequently, the IT department was expected to keep the enterprise systems architecture resilient and supportive of longer-term enterprise growth, while keeping the IT development pipeline aligned with the often unpredictable stream of requests from empowered business constituents. The story begins in 2007, when a new Vice President for IT was appointed for the region. Part A deals with the IT department's efforts to set up a central systems architecture and IT resource estimation review process. Part B deals with demand-side prioritization issues. The suggested teaching plan assumes that Part A is discussed before the students receive Part B. Instructors can use this case to introduce their students to a realistic view on the complex puzzle of establishing enterprise-wide business-IT engagement patterns through IT governance in an empowered and operations-focused business environment.

Case Authors : Stijn Viaene, Steven De Hertogh

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10023359)	-10023359	-	-
Year 1	3451188	-6572171	3451188	0.9434	3255838
Year 2	3961926	-2610245	7413114	0.89	3526100
Year 3	3959396	1349151	11372510	0.8396	3324385
Year 4	3238056	4587207	14610566	0.7921	2564844
TOTAL			14610566		12671167

The Net Present Value at 6% discount rate is 2647808

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. Profitability Index
2. Payback Period
3. Internal Rate of Return
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. 6 Fedex 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 6 Fedex 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 Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA

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 6 Fedex 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 6 Fedex 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	(10023359)	-10023359	-	-
Year 1	3451188	-6572171	3451188	0.8696	3001033
Year 2	3961926	-2610245	7413114	0.7561	2995785
Year 3	3959396	1349151	11372510	0.6575	2603367
Year 4	3238056	4587207	14610566	0.5718	1851369
TOTAL					10451554

The Net NPV after 4 years is 428195

(10451554 - 10023359 )

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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	(10023359)	-10023359	-	-
Year 1	3451188	-6572171	3451188	0.8333	2875990
Year 2	3961926	-2610245	7413114	0.6944	2751338
Year 3	3959396	1349151	11372510	0.5787	2291317
Year 4	3238056	4587207	14610566	0.4823	1561563
TOTAL					9480207

The Net NPV after 4 years is -543152

At 20% discount rate the NPV is negative (9480207 - 10023359 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of 6 Fedex 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 6 Fedex has a NPV value higher than Zero then finance managers at 6 Fedex 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 6 Fedex, then the stock price of the 6 Fedex 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 6 Fedex 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.

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.

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Negotiation Strategy of Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA

References & Further Readings

Stijn Viaene, Steven De Hertogh (2018), "Enterprise-Wide Business-IT Engagement In An Empowered Business Environment: The Case Of FedEx Express EMEA Harvard Business Review Case Study. Published by HBR Publications.