Solutions Care Association: Developing an Integrated CSR Strategy 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 Solutions Care Association: Developing an Integrated CSR Strategy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Solutions Care Association: Developing an Integrated CSR Strategy case study is a Harvard Business School (HBR) case study written by Vesela Veleva. The Solutions Care Association: Developing an Integrated CSR Strategy (referred as “Care Association” 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, Social responsibility, Strategy.

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 Solutions Care Association: Developing an Integrated CSR Strategy Case Study

This case focuses on Solutions Care Association (SCA) - a nonprofit health care organization established in 2000, which quickly became a leader in environmental stewardship and social responsibility. With headquarters in Glenbrook, Nevada, the company had a strong mission and socially responsible culture, which helped attract talent and launch social and environmental initiatives. Despite its numerous achievements and awards, however, there was limited awareness internally and externally about these initiatives and their impact on business and society. In addition, the company did not have a comprehensive way to track and report these achievements. As an emerging leader of the integrated health care plan in the United States, Solutions Care Association had both the responsibility and the opportunity to be a model of what American health care should look like. With growing concerns and scrutiny of the health care industry, there was no better time for Solutions Care Association to continue to strengthen its leadership position in addressing key social and environmental problems, such as providing affordable health care, reducing climate change impacts, phasing out toxic chemicals and creating a safe, culturally sensitive and supportive environment for employees, patients and suppliers.The overall goal of the case is to use the provided information from a comprehensive company assessment to identify a few key areas where Solutions Care Association can focus and demonstrate industry leadership while also supporting the bottom line. A set of key questions is included to guide students' discussion around critical issues for building an integrated CSR strategy for Solutions Care Association, considering its culture, structure and present level of corporate citizenship management.

Case Authors : Vesela Veleva

Topic : Leadership & Managing People

Related Areas : Social responsibility, Strategy

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Calculating Net Present Value (NPV) at 6% for Solutions Care Association: Developing an Integrated CSR Strategy Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10015226)	-10015226	-	-
Year 1	3468290	-6546936	3468290	0.9434	3271972
Year 2	3982371	-2564565	7450661	0.89	3544296
Year 3	3940957	1376392	11391618	0.8396	3308903
Year 4	3229556	4605948	14621174	0.7921	2558111
TOTAL			14621174		12683282

The Net Present Value at 6% discount rate is 2668056

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. Internal Rate of Return
2. Payback Period
3. Net Present Value
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. Care Association 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 Care Association 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 Solutions Care Association: Developing an Integrated CSR Strategy

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 Care Association 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 Care Association 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	(10015226)	-10015226	-	-
Year 1	3468290	-6546936	3468290	0.8696	3015904
Year 2	3982371	-2564565	7450661	0.7561	3011245
Year 3	3940957	1376392	11391618	0.6575	2591243
Year 4	3229556	4605948	14621174	0.5718	1846509
TOTAL					10464901

The Net NPV after 4 years is 449675

(10464901 - 10015226 )

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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	(10015226)	-10015226	-	-
Year 1	3468290	-6546936	3468290	0.8333	2890242
Year 2	3982371	-2564565	7450661	0.6944	2765535
Year 3	3940957	1376392	11391618	0.5787	2280646
Year 4	3229556	4605948	14621174	0.4823	1557463
TOTAL					9493887

The Net NPV after 4 years is -521339

At 20% discount rate the NPV is negative (9493887 - 10015226 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Care Association 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 Care Association has a NPV value higher than Zero then finance managers at Care Association 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 Care Association, then the stock price of the Care Association 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 Care Association 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.

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 can impact the cash flow of 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.

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 Solutions Care Association: Developing an Integrated CSR Strategy

References & Further Readings

Vesela Veleva (2018), "Solutions Care Association: Developing an Integrated CSR Strategy Harvard Business Review Case Study. Published by HBR Publications.