Evaluate Your Business School's Writings As If Your Strategy Matters 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 Evaluate Your Business School's Writings As If Your Strategy Matters case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Evaluate Your Business School's Writings As If Your Strategy Matters case study is a Harvard Business School (HBR) case study written by John L. Cotton, Alex Stewart. The Evaluate Your Business School's Writings As If Your Strategy Matters (referred as “Writings Scholarship” 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, 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 Evaluate Your Business School's Writings As If Your Strategy Matters Case Study

Business school publications are widely criticized for their lack of managerial or teaching relevance. One reason for this criticism is that business school scholarship is typically evaluated purely in terms of one type of work: academic journal articles that are meant to be read by other scholars. However, academics produce multiple types of publications, and business schools serve a wider range of stakeholders. These other stakeholders are often central to the schools' purposes and may be critical in acquiring resources. These stakeholders probably prefer to see scholarship that is relevant for students or for practitioners. They may prefer scholarship that is ethically relevant or regionally relevant and otherwise different from the model that dominates U.S. journals. Technologies are now available to measure the impact of writings in a much wider range of venues than covered by the Social Sciences Citation Index in the Web of Science. Moreover, a wider range of measures, such as the size of writings' readership, may be needed. We consider these issues and present some recommendations, arguing that faculty evaluations should follow an intentional strategy and not necessarily conform to the traditional default.

Case Authors : John L. Cotton, Alex Stewart

Topic : Leadership & Managing People

Related Areas : Strategy

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Calculating Net Present Value (NPV) at 6% for Evaluate Your Business School's Writings As If Your Strategy Matters Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016173)	-10016173	-	-
Year 1	3472825	-6543348	3472825	0.9434	3276250
Year 2	3964540	-2578808	7437365	0.89	3528426
Year 3	3960506	1381698	11397871	0.8396	3325317
Year 4	3226171	4607869	14624042	0.7921	2555430
TOTAL			14624042		12685423

The Net Present Value at 6% discount rate is 2669250

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. Timing of the expected cash flows – stockholders of Writings Scholarship 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. Writings Scholarship shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Evaluate Your Business School's Writings As If Your Strategy Matters

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 Writings Scholarship 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 Writings Scholarship 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	(10016173)	-10016173	-	-
Year 1	3472825	-6543348	3472825	0.8696	3019848
Year 2	3964540	-2578808	7437365	0.7561	2997762
Year 3	3960506	1381698	11397871	0.6575	2604097
Year 4	3226171	4607869	14624042	0.5718	1844574
TOTAL					10466280

The Net NPV after 4 years is 450107

(10466280 - 10016173 )

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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	(10016173)	-10016173	-	-
Year 1	3472825	-6543348	3472825	0.8333	2894021
Year 2	3964540	-2578808	7437365	0.6944	2753153
Year 3	3960506	1381698	11397871	0.5787	2291959
Year 4	3226171	4607869	14624042	0.4823	1555831
TOTAL					9494964

The Net NPV after 4 years is -521209

At 20% discount rate the NPV is negative (9494964 - 10016173 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Writings Scholarship 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 Writings Scholarship has a NPV value higher than Zero then finance managers at Writings Scholarship 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 Writings Scholarship, then the stock price of the Writings Scholarship 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 Writings Scholarship 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 can impact the cash flow of the project.

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 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 Evaluate Your Business School's Writings As If Your Strategy Matters

References & Further Readings

John L. Cotton, Alex Stewart (2018), "Evaluate Your Business School's Writings As If Your Strategy Matters Harvard Business Review Case Study. Published by HBR Publications.