Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking 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 Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking case study is a Harvard Business School (HBR) case study written by Mary Conway Dato-on, Margaret Linnane. The Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking (referred as “Linnane Pnlc's” 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, Leadership, Networking, Strategic planning.

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 Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking Case Study

"Margaret Linnane was distraught and dumbfounded. In addition, she was fuming. She had just arrived home from the funders' meeting where she had been asked questions that came close to challenging the very purpose of her nonprofit organization. She had been unprepared for the very tough questions the funders had asked and she knew that she would need to be much better prepared for the next specially scheduled meeting in one month. She needed answers to the funders' questions and she wondered how to achieve these answers in four short weeks. Linnane and the Rollins College Philanthropy and Nonprofit Leadership Center (PNLC, or the Center) staff put other efforts on hold while they worked intensely to prepare for the upcoming meeting. They gathered all the documents on the PNLC's mission, vision and strategic plan. Brainstorming started. What information did they need to compile to convince the funders that the PNLC's services (such as networking among established chief executive officers (CEOs) and foundation directors, and introducing newcomers to the nonprofit community) contributed to the professionalization of nonprofit leaders and organizations while addressing critical community issues and fulfilling the PNLC's mission - even if such services had not yet generated any revenue? What outcome measures were appropriate for assessing the success of non-income-generating activities such as networking? To start to search for answers to such questions (and others), Linnane decided to review PNLC's performance from the last two years and to build a strategy for 2011/12. Time was of the essence because without the support of funders, Linnane would be hard-pressed to continue offering the now well-accepted networking activities."

Case Authors : Mary Conway Dato-on, Margaret Linnane

Topic : Leadership & Managing People

Related Areas : Leadership, Networking, Strategic planning

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Calculating Net Present Value (NPV) at 6% for Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014807)	-10014807	-	-
Year 1	3470643	-6544164	3470643	0.9434	3274192
Year 2	3981330	-2562834	7451973	0.89	3543370
Year 3	3954639	1391805	11406612	0.8396	3320391
Year 4	3238517	4630322	14645129	0.7921	2565209
TOTAL			14645129		12703161

The Net Present Value at 6% discount rate is 2688354

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. Profitability Index
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 Linnane Pnlc's 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. Linnane Pnlc's 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 Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking

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 Linnane Pnlc's 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 Linnane Pnlc's 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	(10014807)	-10014807	-	-
Year 1	3470643	-6544164	3470643	0.8696	3017950
Year 2	3981330	-2562834	7451973	0.7561	3010457
Year 3	3954639	1391805	11406612	0.6575	2600239
Year 4	3238517	4630322	14645129	0.5718	1851633
TOTAL					10480280

The Net NPV after 4 years is 465473

(10480280 - 10014807 )

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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	(10014807)	-10014807	-	-
Year 1	3470643	-6544164	3470643	0.8333	2892203
Year 2	3981330	-2562834	7451973	0.6944	2764813
Year 3	3954639	1391805	11406612	0.5787	2288564
Year 4	3238517	4630322	14645129	0.4823	1561785
TOTAL					9507364

The Net NPV after 4 years is -507443

At 20% discount rate the NPV is negative (9507364 - 10014807 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Linnane Pnlc's 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 Linnane Pnlc's has a NPV value higher than Zero then finance managers at Linnane Pnlc's 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 Linnane Pnlc's, then the stock price of the Linnane Pnlc's 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 Linnane Pnlc's 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 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.

Understanding of risks involved in the project.

What can impact the cash flow of 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 Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking

References & Further Readings

Mary Conway Dato-on, Margaret Linnane (2018), "Rollins College Nonprofit Leadership and Philanthropy Center: The Importance of Networking Harvard Business Review Case Study. Published by HBR Publications.