Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed 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 Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed case study is a Harvard Business School (HBR) case study written by Linda Bilmes, Matt Mabe. The Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed (referred as “Walter Reed” 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, Government, Leadership, Mergers & acquisitions.

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 Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed Case Study

This case is part of a four part series that examines the merger of the Walter Reed Army Medical Center and the National Naval Military Center at Bethesda - the most expensive, controversial and largest hospital merger in US history. The series includes: A case + A teaching note (Leadership of VADM Mateczun); B case + B teaching note (Army/Navy cultural issues); Epilogue (short conclusion); Film - award winning short documentary. The A case focuses on the leadership of Vice Admiral Dr. John Mateczun, a three-star Navy admiral who led the merger. Mateczun achieved what many considered to be a minor miracle - integrating Walter Reed and Bethesda Naval in the face of fierce institutional resistance. But in his drive to see the plan through, Mateczun stretched the limit of military authority, expended his political capital and alienated friends and colleagues. The case allows discussion of leadership styles and the importance of persuasion, negotiation, communication issues, and personal character. There are two companion cases and a 17-minute film. The film shows a brief history of the hospitals, explains the BRAC (Base Closure Commission), and shows the intensity and urgency of the medical needs of patients being cared for at Walter Reed during the height of the Iraq and Afghanistan wars. The B Case focuses on the difficulties of merging organizations with significant cultural differences. It may be taught together with the (A) case or on its own with the video. The short Epilogue looks at the outcome in 2014, 3 years after the merger. Case number 2035.0

Case Authors : Linda Bilmes, Matt Mabe

Topic : Leadership & Managing People

Related Areas : Government, Leadership, Mergers & acquisitions

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Calculating Net Present Value (NPV) at 6% for Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10006328)	-10006328	-	-
Year 1	3451102	-6555226	3451102	0.9434	3255757
Year 2	3961481	-2593745	7412583	0.89	3525704
Year 3	3957985	1364240	11370568	0.8396	3323201
Year 4	3232340	4596580	14602908	0.7921	2560316
TOTAL			14602908		12664977

The Net Present Value at 6% discount rate is 2658649

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

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. Walter Reed 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 Walter Reed 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 Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed

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 Walter Reed 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 Walter Reed 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	(10006328)	-10006328	-	-
Year 1	3451102	-6555226	3451102	0.8696	3000958
Year 2	3961481	-2593745	7412583	0.7561	2995449
Year 3	3957985	1364240	11370568	0.6575	2602439
Year 4	3232340	4596580	14602908	0.5718	1848101
TOTAL					10446947

The Net NPV after 4 years is 440619

(10446947 - 10006328 )

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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	(10006328)	-10006328	-	-
Year 1	3451102	-6555226	3451102	0.8333	2875918
Year 2	3961481	-2593745	7412583	0.6944	2751028
Year 3	3957985	1364240	11370568	0.5787	2290501
Year 4	3232340	4596580	14602908	0.4823	1558806
TOTAL					9476253

The Net NPV after 4 years is -530075

At 20% discount rate the NPV is negative (9476253 - 10006328 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Walter Reed 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 Walter Reed has a NPV value higher than Zero then finance managers at Walter Reed 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 Walter Reed, then the stock price of the Walter Reed 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 Walter Reed 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 can impact the cash flow of the project.

Understanding of risks involved in 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.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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 Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed

References & Further Readings

Linda Bilmes, Matt Mabe (2018), "Walter Reed National Military Medical Center (B): Integrating Army and Navy Cultures at the New Walter Reed Harvard Business Review Case Study. Published by HBR Publications.