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Jumpstarting the Use of Social Technologies in Your Organization 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 Jumpstarting the Use of Social Technologies in Your Organization case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Jumpstarting the Use of Social Technologies in Your Organization case study is a Harvard Business School (HBR) case study written by Patricia J. Guinan, Salvatore Parise, Keith Rollag. The Jumpstarting the Use of Social Technologies in Your Organization (referred as “Social Technologies” 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, Collaboration, Entrepreneurship, Internet, Leadership, Social platforms.

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 Jumpstarting the Use of Social Technologies in Your Organization Case Study


How do you get your organization to start using social technologies to become more innovative and productive? Where and with whom should you begin? We interviewed over 70 managers across 30 companies and found that the most successful firms employ one of three jumpstart strategies, depending on the organization's mission, work processes, culture, and industry. Some start at the bottom of the organization, finding and enabling 'young experimenters' to use social technologies to enhance their individual productivity. Others start in the middle, finding and helping 'corporate entrepreneurs' in middle management to use social technologies to improve collaboration on teams and projects. Others begin at the top, finding 'enlightened executives' who are open to new technology and the potential of social tools to strengthen their organizational culture. We combine our research with concepts from change management, technology adoption, and social networks to suggest ways managers can best introduce social collaboration tools into their organizations.


Case Authors : Patricia J. Guinan, Salvatore Parise, Keith Rollag

Topic : Leadership & Managing People

Related Areas : Collaboration, Entrepreneurship, Internet, Leadership, Social platforms




Calculating Net Present Value (NPV) at 6% for Jumpstarting the Use of Social Technologies in Your Organization Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10027883) -10027883 - -
Year 1 3470306 -6557577 3470306 0.9434 3273874
Year 2 3961491 -2596086 7431797 0.89 3525713
Year 3 3974792 1378706 11406589 0.8396 3337312
Year 4 3224991 4603697 14631580 0.7921 2554495
TOTAL 14631580 12691393


The Net Present Value at 6% discount rate is 2663510

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. Profitability Index
2. Payback Period
3. Internal Rate of Return
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. Timing of the expected cash flows – stockholders of Social Technologies have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Social Technologies shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.




Formula and Steps to Calculate Net Present Value (NPV) of Jumpstarting the Use of Social Technologies in Your Organization

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 Social Technologies 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 Social Technologies 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 (10027883) -10027883 - -
Year 1 3470306 -6557577 3470306 0.8696 3017657
Year 2 3961491 -2596086 7431797 0.7561 2995456
Year 3 3974792 1378706 11406589 0.6575 2613490
Year 4 3224991 4603697 14631580 0.5718 1843899
TOTAL 10470503


The Net NPV after 4 years is 442620

(10470503 - 10027883 )






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 (10027883) -10027883 - -
Year 1 3470306 -6557577 3470306 0.8333 2891922
Year 2 3961491 -2596086 7431797 0.6944 2751035
Year 3 3974792 1378706 11406589 0.5787 2300227
Year 4 3224991 4603697 14631580 0.4823 1555262
TOTAL 9498446


The Net NPV after 4 years is -529437

At 20% discount rate the NPV is negative (9498446 - 10027883 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Social Technologies 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 Social Technologies has a NPV value higher than Zero then finance managers at Social Technologies 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 Social Technologies, then the stock price of the Social Technologies 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 Social Technologies 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 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.

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

What can impact the cash flow of the project.

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.




References & Further Readings

Patricia J. Guinan, Salvatore Parise, Keith Rollag (2018), "Jumpstarting the Use of Social Technologies in Your Organization Harvard Business Review Case Study. Published by HBR Publications.