Introduction to Change Management Collection 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 Introduction to Change Management Collection case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Introduction to Change Management Collection case study is a Harvard Business School (HBR) case study written by Harvard Business Review. The Introduction to Change Management Collection (referred as “Change Kotter's” 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, Leadership, Strategy execution.

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 Introduction to Change Management Collection Case Study

This set will prove to be an indispensable collection for anyone seeking to successfully implement change within their organization--all at a savings of more than 35% off the individual component prices.This specially priced set includes: A true leadership classic and an international bestseller "Leading Change" (Hardcover) --now with a new preface by the author--"Leading Change" is widely recognized as Kotter's seminal work on leading transformational change, and is an important precursor to his newer ideas on acceleration: effectively managing operations while seizing new opportunity. Needed more today than at any time in the past, this immensely relevant book serves as both a visionary guide and a practical toolkit on how to approach the difficult yet crucial work of leading change in any type of organization. "The Heart of Change: Real-Life Stories of How People Change Their Organizations" (Hardcover) by John P. Kotter and Dan S. Cohen, a compact, no-nonsense book that captures both the heart--and the "how"--of successful change. Organizations are forced to change faster and more radically than ever. How are companies faring in meeting these challenges--and what can we learn from their experiences? In this powerful follow-up book--organized around "Leading Change's" revolutionary eight-step change process--Kotter and Cohen reveal the results of their research in over 100 organizations in the midst of large-scale change. Through true stories from real people, the authors present a play-by-play of challenges encountered, mistakes made, and lessons learned through each of the eight steps of change--and offer tips and tools readers can apply within their own organizations. And "Accelerate!" (HBR Article) in which Kotter predicts that dual operating systems will lead to long-term success in the 21st century--for shareholders, customers, employees, and companies themselves. New to John Kotter's ideas on change management? Get the refreshed versions of Kotter's classic books "Leading Change" and "The Heart of Change" plus his new Harvard Business Review article "Accelerate!" and discover his now legendary process for managing change in an organization and his new ideas on acceleration.

Case Authors : Harvard Business Review

Topic : Leadership & Managing People

Related Areas : Leadership, Strategy execution

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Calculating Net Present Value (NPV) at 6% for Introduction to Change Management Collection Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018221)	-10018221	-	-
Year 1	3460823	-6557398	3460823	0.9434	3264927
Year 2	3965344	-2592054	7426167	0.89	3529142
Year 3	3955786	1363732	11381953	0.8396	3321354
Year 4	3246779	4610511	14628732	0.7921	2571753
TOTAL			14628732		12687177

The Net Present Value at 6% discount rate is 2668956

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. Change Kotter's 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 Change Kotter's 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 Introduction to Change Management Collection

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 Change Kotter's 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 Change Kotter's 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	(10018221)	-10018221	-	-
Year 1	3460823	-6557398	3460823	0.8696	3009411
Year 2	3965344	-2592054	7426167	0.7561	2998370
Year 3	3955786	1363732	11381953	0.6575	2600994
Year 4	3246779	4610511	14628732	0.5718	1856356
TOTAL					10465131

The Net NPV after 4 years is 446910

(10465131 - 10018221 )

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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	(10018221)	-10018221	-	-
Year 1	3460823	-6557398	3460823	0.8333	2884019
Year 2	3965344	-2592054	7426167	0.6944	2753711
Year 3	3955786	1363732	11381953	0.5787	2289228
Year 4	3246779	4610511	14628732	0.4823	1565769
TOTAL					9492727

The Net NPV after 4 years is -525494

At 20% discount rate the NPV is negative (9492727 - 10018221 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Change Kotter's 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 Change Kotter's has a NPV value higher than Zero then finance managers at Change Kotter's 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 Change Kotter's, then the stock price of the Change Kotter's 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 Change Kotter's 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 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.

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 Introduction to Change Management Collection

References & Further Readings

Harvard Business Review (2018), "Introduction to Change Management Collection Harvard Business Review Case Study. Published by HBR Publications.