The Smart Way to Respond to Negative Emotions at Work 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 The Smart Way to Respond to Negative Emotions at Work case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Smart Way to Respond to Negative Emotions at Work case study is a Harvard Business School (HBR) case study written by Christine Pearson. The The Smart Way to Respond to Negative Emotions at Work (referred as “Emotions Negative” 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, Psychology, Workspaces.

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 The Smart Way to Respond to Negative Emotions at Work Case Study

This is an MIT Sloan Management Review article. It is impossible to block negative emotions from the workplace. Whether provoked by bad decisions, misfortune, or employees' personal problems, no organization is immune from trouble, and trouble agitates bad feelings. In many organizations, negative emotions are brushed aside or are altogether taboo. However, discounting or brushing aside negative emotions can be costly to organizations -leading to lost productivity and employee disengagement. For more than two decades, the author has studied workplace circumstances that evoke negative emotions, from exceptional organizational crises to everyday incivility. One fundamental finding is that few executives handle employees' negative feelings well. Many managers report that they do not know how to deal with negative emotions in the workplace. To address this condition, the author details how to improve competence and confidence in responding to negative emotions. She recommends specific actions to prepare for and step up to negative emotions at work -including anger, fear, and sadness, in particular. Promptly stepping up to negative emotions, the author points out, can stem interpersonal turbulence and keep satisfaction, engagement, and productivity intact. What's more, when negative emotions are acknowledged openly, the author argues, employees can learn to anticipate and interpret their colleagues' reactions to difficult circumstances more astutely. They grow to understand their own reactions better, too. With these improvements, appropriate responses to challenging situations can be made earlier, when adjustments are generally easier, more effective, and less expensive.

Case Authors : Christine Pearson

Topic : Leadership & Managing People

Related Areas : Psychology, Workspaces

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Calculating Net Present Value (NPV) at 6% for The Smart Way to Respond to Negative Emotions at Work Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10028764)	-10028764	-	-
Year 1	3444127	-6584637	3444127	0.9434	3249176
Year 2	3971607	-2613030	7415734	0.89	3534716
Year 3	3936573	1323543	11352307	0.8396	3305223
Year 4	3222473	4546016	14574780	0.7921	2552500
TOTAL			14574780		12641616

The Net Present Value at 6% discount rate is 2612852

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. Payback Period
4. Internal Rate of Return

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. Emotions Negative 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 Emotions Negative 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 The Smart Way to Respond to Negative Emotions at Work

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 Emotions Negative 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 Emotions Negative 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	(10028764)	-10028764	-	-
Year 1	3444127	-6584637	3444127	0.8696	2994893
Year 2	3971607	-2613030	7415734	0.7561	3003105
Year 3	3936573	1323543	11352307	0.6575	2588361
Year 4	3222473	4546016	14574780	0.5718	1842459
TOTAL					10428819

The Net NPV after 4 years is 400055

(10428819 - 10028764 )

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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	(10028764)	-10028764	-	-
Year 1	3444127	-6584637	3444127	0.8333	2870106
Year 2	3971607	-2613030	7415734	0.6944	2758060
Year 3	3936573	1323543	11352307	0.5787	2278109
Year 4	3222473	4546016	14574780	0.4823	1554048
TOTAL					9460323

The Net NPV after 4 years is -568441

At 20% discount rate the NPV is negative (9460323 - 10028764 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Emotions Negative 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 Emotions Negative has a NPV value higher than Zero then finance managers at Emotions Negative 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 Emotions Negative, then the stock price of the Emotions Negative 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 Emotions Negative 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 –

Understanding of risks involved in the project.

What can impact the cash flow of the project.

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

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.

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Negotiation Strategy of The Smart Way to Respond to Negative Emotions at Work

References & Further Readings

Christine Pearson (2018), "The Smart Way to Respond to Negative Emotions at Work Harvard Business Review Case Study. Published by HBR Publications.