Benefit Corporation Legislation and the Emergence of a Social Hybrid Category 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 Benefit Corporation Legislation and the Emergence of a Social Hybrid Category case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Benefit Corporation Legislation and the Emergence of a Social Hybrid Category case study is a Harvard Business School (HBR) case study written by Hans Rawhouser, Michael Cummings, Andrew Crane. The Benefit Corporation Legislation and the Emergence of a Social Hybrid Category (referred as “Hybrids Legislation” 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, Policy, Regulation, Social enterprise.

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 Benefit Corporation Legislation and the Emergence of a Social Hybrid Category Case Study

Previous research highlights tensions that social hybrids face by spanning categories. This article explores the emergence of legislation to support a new category for social hybrids, focusing on Benefit Corporation legislation in the United States. It presents quantitative analysis of state-level factors that make a state suitable for a social hybrid category (attractiveness for for-profit business and nonprofits, existing social hybrid organizations, legislative intensity, and political leanings) followed by qualitative analysis of the arguments marshaled for the creation of the Benefit Corporation legal form. These findings raise important insights for research on social hybrids and suggest a range of practical implications.

Case Authors : Hans Rawhouser, Michael Cummings, Andrew Crane

Topic : Leadership & Managing People

Related Areas : Policy, Regulation, Social enterprise

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Calculating Net Present Value (NPV) at 6% for Benefit Corporation Legislation and the Emergence of a Social Hybrid Category Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10023511)	-10023511	-	-
Year 1	3457602	-6565909	3457602	0.9434	3261889
Year 2	3982002	-2583907	7439604	0.89	3543968
Year 3	3973230	1389323	11412834	0.8396	3336001
Year 4	3223628	4612951	14636462	0.7921	2553415
TOTAL			14636462		12695272

The Net Present Value at 6% discount rate is 2671761

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. Net Present Value
3. Profitability Index
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. Hybrids Legislation 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 Hybrids Legislation 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 Benefit Corporation Legislation and the Emergence of a Social Hybrid Category

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 Hybrids Legislation 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 Hybrids Legislation 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	(10023511)	-10023511	-	-
Year 1	3457602	-6565909	3457602	0.8696	3006610
Year 2	3982002	-2583907	7439604	0.7561	3010966
Year 3	3973230	1389323	11412834	0.6575	2612463
Year 4	3223628	4612951	14636462	0.5718	1843120
TOTAL					10473159

The Net NPV after 4 years is 449648

(10473159 - 10023511 )

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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	(10023511)	-10023511	-	-
Year 1	3457602	-6565909	3457602	0.8333	2881335
Year 2	3982002	-2583907	7439604	0.6944	2765279
Year 3	3973230	1389323	11412834	0.5787	2299323
Year 4	3223628	4612951	14636462	0.4823	1554605
TOTAL					9500542

The Net NPV after 4 years is -522969

At 20% discount rate the NPV is negative (9500542 - 10023511 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Hybrids Legislation 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 Hybrids Legislation has a NPV value higher than Zero then finance managers at Hybrids Legislation 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 Hybrids Legislation, then the stock price of the Hybrids Legislation 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 Hybrids Legislation 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.

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 can impact the cash flow of 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 Benefit Corporation Legislation and the Emergence of a Social Hybrid Category

References & Further Readings

Hans Rawhouser, Michael Cummings, Andrew Crane (2018), "Benefit Corporation Legislation and the Emergence of a Social Hybrid Category Harvard Business Review Case Study. Published by HBR Publications.