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Renewing GE: The Africa Project (A) 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 Renewing GE: The Africa Project (A) case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Renewing GE: The Africa Project (A) case study is a Harvard Business School (HBR) case study written by David A. Thomas, Stephanie J. Creary. The Renewing GE: The Africa Project (A) (referred as “Aaf Africa” 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, Diversity, Human resource management.

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




Case Description of Renewing GE: The Africa Project (A) Case Study


This case profiles the evolution of General Electric's African American Form (AAF), an employee affinity group, and its efforts to increase the company's involvement in Africa. The AAF formed in 1991 to help advance GE's recruitment, retention and development of black employees. By 1995, members of the AAF started asking Jack Welch whether the company was planning to develop business in Africa. After Welch invited the group to conduct due diligence, it was concluded that the timing was not right for GE to make a significant investment in Africa. Yet, when Jeffrey Immelt began attending the AAF Symposia in 2001, the question about GE's involvement in Africa resurfaced. In 2004, Immelt pledged $20 million to fund, "The Africa Project" (later renamed, "Developing Health Globally")-a GE philanthropic effort sponsored by the GE Foundation and the AAF to improve healthcare outcomes in Africa.


Case Authors : David A. Thomas, Stephanie J. Creary

Topic : Leadership & Managing People

Related Areas : Diversity, Human resource management




Calculating Net Present Value (NPV) at 6% for Renewing GE: The Africa Project (A) Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10022280) -10022280 - -
Year 1 3451011 -6571269 3451011 0.9434 3255671
Year 2 3967388 -2603881 7418399 0.89 3530961
Year 3 3944324 1340443 11362723 0.8396 3311730
Year 4 3241425 4581868 14604148 0.7921 2567512
TOTAL 14604148 12665875


The Net Present Value at 6% discount rate is 2643595

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.




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. Aaf Africa 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 Aaf Africa have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of Renewing GE: The Africa Project (A)

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 Aaf Africa 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 Aaf Africa 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 (10022280) -10022280 - -
Year 1 3451011 -6571269 3451011 0.8696 3000879
Year 2 3967388 -2603881 7418399 0.7561 2999915
Year 3 3944324 1340443 11362723 0.6575 2593457
Year 4 3241425 4581868 14604148 0.5718 1853295
TOTAL 10447547


The Net NPV after 4 years is 425267

(10447547 - 10022280 )






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 (10022280) -10022280 - -
Year 1 3451011 -6571269 3451011 0.8333 2875843
Year 2 3967388 -2603881 7418399 0.6944 2755131
Year 3 3944324 1340443 11362723 0.5787 2282595
Year 4 3241425 4581868 14604148 0.4823 1563187
TOTAL 9476755


The Net NPV after 4 years is -545525

At 20% discount rate the NPV is negative (9476755 - 10022280 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Aaf Africa 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 Aaf Africa has a NPV value higher than Zero then finance managers at Aaf Africa 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 Aaf Africa, then the stock price of the Aaf Africa 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 Aaf Africa 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 –

Understanding of risks involved in the project.

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

What can impact the cash flow of 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.




References & Further Readings

David A. Thomas, Stephanie J. Creary (2018), "Renewing GE: The Africa Project (A) Harvard Business Review Case Study. Published by HBR Publications.