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Developing Versatile Leadership 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 Developing Versatile Leadership case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Developing Versatile Leadership case study is a Harvard Business School (HBR) case study written by Robert B. Kaiser, Robert E. Kaplan. The Developing Versatile Leadership (referred as “Imbalance Versatility” 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, Human resource management, Leadership, Organizational structure.

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






Case Description of Developing Versatile Leadership Case Study


This is an MIT Sloan Management Review article. Modern models of leadership generally acknowledge that effective leaders must possess a number of seemingly contradictory qualities and skill sets. However, say the authors, inadequate performance is usually defined as displaying a lack of those qualities and skills; the idea that performance problems can just as easily spring from taking a given behavior to an extreme has received far less attention. Therefore, those models miss the chance to identify imbalance, which in the authors' view is the most common impediment to developing effective leadership. The authors view versatility, the absence of imbalance, as the key to high performance levels. Versatile leaders are able to continually adjust their behavior, deftly applying the right approach or blend of approaches to the right degree for the circumstances at hand. The authors' research, comprising comprehensive assessments of scores of senior managers, indicates that most managers, when presented with two opposing approaches, such as forceful vs. enabling leadership, will lean strongly toward one and be biased against the other. Employing a 360-degree survey they designed to measure such imbalance, called the Leadership Versatility Index, the authors then demonstrate clearly that high performance levels are correlated with balance and versatility. The challenge for the versatile leader is, thus, to meet what F. Scott Fitzgerald called "the test of a first-rate intelligence": to hold two opposed ideas in the mind at the same time and still retain the ability to function. The authors conclude with a discussion of how leaders can begin to improve themselves and those they manage. They identify a number of root causes of imbalance and suggest ways to moderate these factors.


Case Authors : Robert B. Kaiser, Robert E. Kaplan

Topic : Leadership & Managing People

Related Areas : Human resource management, Leadership, Organizational structure




Calculating Net Present Value (NPV) at 6% for Developing Versatile Leadership Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10014976) -10014976 - -
Year 1 3471737 -6543239 3471737 0.9434 3275224
Year 2 3963599 -2579640 7435336 0.89 3527589
Year 3 3962260 1382620 11397596 0.8396 3326790
Year 4 3238911 4621531 14636507 0.7921 2565521
TOTAL 14636507 12695123




The Net Present Value at 6% discount rate is 2680147

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.




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. Net Present Value
3. Profitability Index
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 Imbalance Versatility 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. Imbalance Versatility shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.






Formula and Steps to Calculate Net Present Value (NPV) of Developing Versatile Leadership

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 Imbalance Versatility 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 Imbalance Versatility 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 (10014976) -10014976 - -
Year 1 3471737 -6543239 3471737 0.8696 3018902
Year 2 3963599 -2579640 7435336 0.7561 2997050
Year 3 3962260 1382620 11397596 0.6575 2605250
Year 4 3238911 4621531 14636507 0.5718 1851858
TOTAL 10473060


The Net NPV after 4 years is 458084

(10473060 - 10014976 )








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 (10014976) -10014976 - -
Year 1 3471737 -6543239 3471737 0.8333 2893114
Year 2 3963599 -2579640 7435336 0.6944 2752499
Year 3 3962260 1382620 11397596 0.5787 2292975
Year 4 3238911 4621531 14636507 0.4823 1561975
TOTAL 9500563


The Net NPV after 4 years is -514413

At 20% discount rate the NPV is negative (9500563 - 10014976 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Imbalance Versatility 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 Imbalance Versatility has a NPV value higher than Zero then finance managers at Imbalance Versatility 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 Imbalance Versatility, then the stock price of the Imbalance Versatility 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 Imbalance Versatility 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 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 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.

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.






Negotiation Strategy of Developing Versatile Leadership

References & Further Readings

Robert B. Kaiser, Robert E. Kaplan (2018), "Developing Versatile Leadership Harvard Business Review Case Study. Published by HBR Publications.


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