Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance 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 Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance case study is a Harvard Business School (HBR) case study written by D. Charles Galunic, Anne-Marie Carrick. The Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance (referred as “Norwich Nui” 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, Corporate governance, Growth strategy, International business, Leadership, Mergers & acquisitions, Organizational culture, Strategy execution.

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 Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance Case Study

This two-part case study describes the initial merger and cultural transformation of Aviva's Norwich Union (NUI) operation in the UK. It examines the complexities of integration that arose following a series of mergers that created NUI from 1998 to 2000. Case A describes how, after CGU Plc and Norwich Union joined forces to become NUI, top management's priority was to restore profits. Behind the scenes, however, the need for a whole new corporate culture was becoming increasingly imperative. It shows the tension between the need for immediate gains in efficiencies vs. longer-term approaches to the business that required careful nurturing and attention. It ends as the executive team's announcement of the new corporate philosophy - "to be a service provider with insurance at our core and care at our heart" - is greeted with complete disbelief by employees. Case B describes the actions taken to overcome their skepticism and successfully implement the new philosophy - actions that required significant change to the organisational culture.

Case Authors : D. Charles Galunic, Anne-Marie Carrick

Topic : Leadership & Managing People

Related Areas : Corporate governance, Growth strategy, International business, Leadership, Mergers & acquisitions, Organizational culture, Strategy execution

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Calculating Net Present Value (NPV) at 6% for Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10029310)	-10029310	-	-
Year 1	3468029	-6561281	3468029	0.9434	3271725
Year 2	3973224	-2588057	7441253	0.89	3536155
Year 3	3947308	1359251	11388561	0.8396	3314236
Year 4	3250425	4609676	14638986	0.7921	2574641
TOTAL			14638986		12696758

The Net Present Value at 6% discount rate is 2667448

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. Net Present Value
2. Profitability Index
3. Internal Rate of Return
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. Timing of the expected cash flows – stockholders of Norwich Nui 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. Norwich Nui 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 Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance

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 Norwich Nui 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 Norwich Nui 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	(10029310)	-10029310	-	-
Year 1	3468029	-6561281	3468029	0.8696	3015677
Year 2	3973224	-2588057	7441253	0.7561	3004328
Year 3	3947308	1359251	11388561	0.6575	2595419
Year 4	3250425	4609676	14638986	0.5718	1858441
TOTAL					10473866

The Net NPV after 4 years is 444556

(10473866 - 10029310 )

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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	(10029310)	-10029310	-	-
Year 1	3468029	-6561281	3468029	0.8333	2890024
Year 2	3973224	-2588057	7441253	0.6944	2759183
Year 3	3947308	1359251	11388561	0.5787	2284322
Year 4	3250425	4609676	14638986	0.4823	1567527
TOTAL					9501057

The Net NPV after 4 years is -528253

At 20% discount rate the NPV is negative (9501057 - 10029310 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Norwich Nui 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 Norwich Nui has a NPV value higher than Zero then finance managers at Norwich Nui 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 Norwich Nui, then the stock price of the Norwich Nui 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 Norwich Nui 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.

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 Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance

References & Further Readings

D. Charles Galunic, Anne-Marie Carrick (2018), "Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance Harvard Business Review Case Study. Published by HBR Publications.