The Chicago Blackhawks: Greatest Sports Business Turnaround Ever? 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 The Chicago Blackhawks: Greatest Sports Business Turnaround Ever? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Chicago Blackhawks: Greatest Sports Business Turnaround Ever? case study is a Harvard Business School (HBR) case study written by James Shein, Scott Kannry. The The Chicago Blackhawks: Greatest Sports Business Turnaround Ever? (referred as “Blackhawks Team” 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, Competitive strategy, Leadership, Organizational culture, Public relations.

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 The Chicago Blackhawks: Greatest Sports Business Turnaround Ever? Case Study

This case explores the turnaround and corporate renewal of the Chicago Blackhawks professional hockey team, which transformed from one of the worst-run organizations in all of professional sports in 2007 to one that won the Stanley Cup (the National Hockey League championship trophy) in 2010. W. Rockwell "Rocky" Wirtz was faced with making critical decisions shortly after inheriting the team from his father, who was the individual most associated with the organization's decline. The team faced financial trouble and had narrowly avoided missing payroll; the previous customer relations strategy (which included refusing to televise home games or to conduct effective marketing) had resulted in significantly diminished brand value; and management and player personnel were devoid of effective leadership. At its nadir, the team was named "The Worst Franchise in Professional Sports" by ESPN in 2004. After assuming control, Rocky embarked on an ambitious corporate renewal strategy that included the following components: a?? Leadership: Install a new management team with clear goals and creative ideas about how to turn around the organization a?? Culture: Reward players for accomplishing their goals and establish a performance-based culture a?? Financial: Seek new corporate sponsorships and increase ticket prices once the team established a winning recordBrand and Marketing: Send a clear message that the team was intent upon winning the championship and design a customer-focused marketing strategy

Case Authors : James Shein, Scott Kannry

Topic : Leadership & Managing People

Related Areas : Competitive strategy, Leadership, Organizational culture, Public relations

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Calculating Net Present Value (NPV) at 6% for The Chicago Blackhawks: Greatest Sports Business Turnaround Ever? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018356)	-10018356	-	-
Year 1	3468265	-6550091	3468265	0.9434	3271948
Year 2	3960123	-2589968	7428388	0.89	3524495
Year 3	3941324	1351356	11369712	0.8396	3309212
Year 4	3243279	4594635	14612991	0.7921	2568981
TOTAL			14612991		12674636

The Net Present Value at 6% discount rate is 2656280

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

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. Blackhawks Team 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 Blackhawks Team 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 The Chicago Blackhawks: Greatest Sports Business Turnaround Ever?

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 Blackhawks Team 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 Blackhawks Team 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	(10018356)	-10018356	-	-
Year 1	3468265	-6550091	3468265	0.8696	3015883
Year 2	3960123	-2589968	7428388	0.7561	2994422
Year 3	3941324	1351356	11369712	0.6575	2591485
Year 4	3243279	4594635	14612991	0.5718	1854355
TOTAL					10456144

The Net NPV after 4 years is 437788

(10456144 - 10018356 )

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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	(10018356)	-10018356	-	-
Year 1	3468265	-6550091	3468265	0.8333	2890221
Year 2	3960123	-2589968	7428388	0.6944	2750085
Year 3	3941324	1351356	11369712	0.5787	2280859
Year 4	3243279	4594635	14612991	0.4823	1564081
TOTAL					9485246

The Net NPV after 4 years is -533110

At 20% discount rate the NPV is negative (9485246 - 10018356 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Blackhawks Team 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 Blackhawks Team has a NPV value higher than Zero then finance managers at Blackhawks Team 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 Blackhawks Team, then the stock price of the Blackhawks Team 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 Blackhawks Team 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.

What will be a multi year spillover effect of various taxation regulations.

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.

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 The Chicago Blackhawks: Greatest Sports Business Turnaround Ever?

References & Further Readings

James Shein, Scott Kannry (2018), "The Chicago Blackhawks: Greatest Sports Business Turnaround Ever? Harvard Business Review Case Study. Published by HBR Publications.