Managing Millennials: Embracing Generational Differences 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 Managing Millennials: Embracing Generational Differences case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Managing Millennials: Embracing Generational Differences case study is a Harvard Business School (HBR) case study written by Jeanine S. Stewart, Elizabeth Goad Oliver, Karen S. Cravens, Shigehiro Oishi. The Managing Millennials: Embracing Generational Differences (referred as “Workplace Generational” 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, Human resource management, Labor, 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

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Case Description of Managing Millennials: Embracing Generational Differences Case Study

The topic of the Millennial Generation in the workplace drives much business conversation, as members of this generation form a growing percentage of the employee base. Both popular media and scholarly literature have painted the population of younger workers in an uncharitable light. The goals of this article are to contextualize the results of a large, empirical study in a more charitable light and to suggest that embracing generational differences provides an opportunity as well as a challenge. This article examines traits of the different generations, in addition to the relationship between organizational commitment and workplace culture. We present findings that show millennials (also known as Generation Y, or Gen Y) as the only generational group that does not conceptually link organizational commitment with workplace culture. This group also thinks of work differently than members of the other generations, yet these differences can be understood through a managerial lens focusing on qualities such as duty, drive, and reward. We argue that by changing performance evaluation metrics to encompass a greater variety of measures, managers can provide a more detailed picture of the employee's work, and thus impact the worker's sense of duty. Additionally, by providing a more transparent workplace, employers can increase the employee's drive and clearly demonstrate the reward that workers will receive. Finally, changes that help newer employees adjust to the workplace can also allow the organization to operate more efficiently, benefiting employees of all generations.

Case Authors : Jeanine S. Stewart, Elizabeth Goad Oliver, Karen S. Cravens, Shigehiro Oishi

Topic : Leadership & Managing People

Related Areas : Human resource management, Labor, Organizational culture

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Calculating Net Present Value (NPV) at 6% for Managing Millennials: Embracing Generational Differences Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10003636)	-10003636	-	-
Year 1	3456049	-6547587	3456049	0.9434	3260424
Year 2	3965999	-2581588	7422048	0.89	3529725
Year 3	3940515	1358927	11362563	0.8396	3308532
Year 4	3238896	4597823	14601459	0.7921	2565509
TOTAL			14601459		12664190

The Net Present Value at 6% discount rate is 2660554

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. Net Present Value
3. Payback Period
4. Internal Rate of Return

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. Workplace Generational 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 Workplace Generational 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 Managing Millennials: Embracing Generational Differences

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 Workplace Generational 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 Workplace Generational 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	(10003636)	-10003636	-	-
Year 1	3456049	-6547587	3456049	0.8696	3005260
Year 2	3965999	-2581588	7422048	0.7561	2998865
Year 3	3940515	1358927	11362563	0.6575	2590953
Year 4	3238896	4597823	14601459	0.5718	1851849
TOTAL					10446927

The Net NPV after 4 years is 443291

(10446927 - 10003636 )

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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	(10003636)	-10003636	-	-
Year 1	3456049	-6547587	3456049	0.8333	2880041
Year 2	3965999	-2581588	7422048	0.6944	2754166
Year 3	3940515	1358927	11362563	0.5787	2280391
Year 4	3238896	4597823	14601459	0.4823	1561968
TOTAL					9476565

The Net NPV after 4 years is -527071

At 20% discount rate the NPV is negative (9476565 - 10003636 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Workplace Generational 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 Workplace Generational has a NPV value higher than Zero then finance managers at Workplace Generational 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 Workplace Generational, then the stock price of the Workplace Generational 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 Workplace Generational 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 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.

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.

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 Managing Millennials: Embracing Generational Differences

References & Further Readings

Jeanine S. Stewart, Elizabeth Goad Oliver, Karen S. Cravens, Shigehiro Oishi (2018), "Managing Millennials: Embracing Generational Differences Harvard Business Review Case Study. Published by HBR Publications.