New Balance: 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 New Balance: Developing an Integrated CSR Strategy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. New Balance: Developing an Integrated CSR Strategy case study is a Harvard Business School (HBR) case study written by Vesela Veleva. The New Balance: Developing an Integrated CSR Strategy (referred as “Balance Csr” 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, Strategic planning, Sustainability.

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 New Balance: Developing an Integrated CSR Strategy Case Study

"This case focuses on New Balance - a privately held company and the fourth largest athletic footwear manufacturer in the world. Founded over 100 years ago, New Balance has a strong social responsibility culture and mission established by its owners. Its commitment to employees, for example, was expressed through maintaining domestic manufacturing in the United States (the only large footwear manufacturer to do so presently) and avoiding layoffs in the deep recession of 2007-2009. In the late 1990s, the company established the Responsible Leadership Steering Committee to address human rights issues in overseas factories. Throughout the years, private ownership had allowed New Balance to take risks and make choices that publicly held companies might not have been able to do; at the same time, private ownership also meant lower pressures to disclose social and environmental performance. The owners were also very "humble" and hesitant to talk aloud about social responsibility. As a global player, the present challenge for the company has become to move corporate social responsibility (CSR) to the next level - from "doing what's right" to fully integrating CSR into the business strategy. The overall goal of the case is to use the provided information from a comprehensive company assessment to identify a few key areas where New Balance can focus on and demonstrate industry leadership while also supporting the bottom line. A set of key questions is included at the end of the paper to guide students' discussion around critical issues for building an integrated CSR strategy for New Balance, considering its culture, structure and present level of corporate citizenship management."

Case Authors : Vesela Veleva

Topic : Leadership & Managing People

Related Areas : Social responsibility, Strategic planning, Sustainability

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Calculating Net Present Value (NPV) at 6% for New Balance: Developing an Integrated CSR Strategy Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10013186)	-10013186	-	-
Year 1	3468464	-6544722	3468464	0.9434	3272136
Year 2	3982442	-2562280	7450906	0.89	3544359
Year 3	3939636	1377356	11390542	0.8396	3307794
Year 4	3228941	4606297	14619483	0.7921	2557624
TOTAL			14619483		12681913

The Net Present Value at 6% discount rate is 2668727

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. Profitability Index
2. Internal Rate of Return
3. Payback Period
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 Balance Csr 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. Balance Csr 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 New Balance: 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 Balance Csr 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 Balance Csr 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	(10013186)	-10013186	-	-
Year 1	3468464	-6544722	3468464	0.8696	3016056
Year 2	3982442	-2562280	7450906	0.7561	3011298
Year 3	3939636	1377356	11390542	0.6575	2590375
Year 4	3228941	4606297	14619483	0.5718	1846157
TOTAL					10463886

The Net NPV after 4 years is 450700

(10463886 - 10013186 )

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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	(10013186)	-10013186	-	-
Year 1	3468464	-6544722	3468464	0.8333	2890387
Year 2	3982442	-2562280	7450906	0.6944	2765585
Year 3	3939636	1377356	11390542	0.5787	2279882
Year 4	3228941	4606297	14619483	0.4823	1557167
TOTAL					9493020

The Net NPV after 4 years is -520166

At 20% discount rate the NPV is negative (9493020 - 10013186 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Balance Csr 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 Balance Csr has a NPV value higher than Zero then finance managers at Balance Csr 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 Balance Csr, then the stock price of the Balance Csr 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 Balance Csr 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.

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

Understanding of risks involved in 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 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 New Balance: Developing an Integrated CSR Strategy

References & Further Readings

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