Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A) 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 Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A) case study is a Harvard Business School (HBR) case study written by Shlomo Ben-Hur, Bernard J. Jaworski, David Gray. The Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A) (referred as “Crotonville Imagining” 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, Knowledge management, Leadership development, Manufacturing, 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 Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A) Case Study

The case examines the evolution of GE's corporate university in Crotonville, NY from its founding in 1956 through 2010 and the start of an effort of "Re-Imagining Crotonville." One of the world's first corporate universities, Crotonville became a model of leadership development and a recognized innovator in its field. The case details the role that Crotonville played under successive GE leaders, from Ralph Cordiner - who inaugurated Crotonville to train general managers to support a sweeping decentralization program - to Jeffrey Immelt. It considers how the institution changed in response to changing business needs and the factors that contributed to its vitality and success over several decades. Beginning in the 1980s, Crotonville became the nerve center of a cultural change effort launched by CEO Jack Welch, spawning programs such as "Work-Out" to cut through bureaucracy and return initiative to individual managers. Following the global financial crisis in 2008-9, CEO Jeffrey Immelt and Crotonville's leaders set in motion an exploration of the changing nature of leadership needed to confront the new realities in which GE operated globally. CLO Susan Peters initiated Re-Imagining Crotonville to align learning and development with these new leadership expectations. The case examines the choices faced by Peters and her team in re-thinking the environment, experience, and content of leadership learning at Crotonville. Learning objectives: Understand factors that have made Crotonville central to GE's leadership culture over time. Examine role of CEO and corporate leadership in driving cultural change through learning and development. Understand the unique assets and potential limitations of a 'corporate university' model for leadership learning. Explore the change management challenges of managing a legacy of success - continuing to evolve while preserving the strong 'brand' and 'secret sauce' that make Crotonville unique.

Case Authors : Shlomo Ben-Hur, Bernard J. Jaworski, David Gray

Topic : Leadership & Managing People

Related Areas : Knowledge management, Leadership development, Manufacturing, Strategy

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Calculating Net Present Value (NPV) at 6% for Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019360)	-10019360	-	-
Year 1	3460621	-6558739	3460621	0.9434	3264737
Year 2	3959164	-2599575	7419785	0.89	3523642
Year 3	3958651	1359076	11378436	0.8396	3323760
Year 4	3235390	4594466	14613826	0.7921	2562732
TOTAL			14613826		12674870

The Net Present Value at 6% discount rate is 2655510

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. Net Present Value
4. Payback Period

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. Crotonville Imagining 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 Crotonville Imagining 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 Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A)

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 Crotonville Imagining 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 Crotonville Imagining 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	(10019360)	-10019360	-	-
Year 1	3460621	-6558739	3460621	0.8696	3009236
Year 2	3959164	-2599575	7419785	0.7561	2993697
Year 3	3958651	1359076	11378436	0.6575	2602877
Year 4	3235390	4594466	14613826	0.5718	1849845
TOTAL					10455654

The Net NPV after 4 years is 436294

(10455654 - 10019360 )

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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	(10019360)	-10019360	-	-
Year 1	3460621	-6558739	3460621	0.8333	2883851
Year 2	3959164	-2599575	7419785	0.6944	2749419
Year 3	3958651	1359076	11378436	0.5787	2290886
Year 4	3235390	4594466	14613826	0.4823	1560277
TOTAL					9484433

The Net NPV after 4 years is -534927

At 20% discount rate the NPV is negative (9484433 - 10019360 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Crotonville Imagining 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 Crotonville Imagining has a NPV value higher than Zero then finance managers at Crotonville Imagining 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 Crotonville Imagining, then the stock price of the Crotonville Imagining 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 Crotonville Imagining 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 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.

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 Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A)

References & Further Readings

Shlomo Ben-Hur, Bernard J. Jaworski, David Gray (2018), "Re-Imagining Crotonville: Epicenter of GE's Leadership Culture (A) Harvard Business Review Case Study. Published by HBR Publications.