Goodjobz: Challenges in Creating a Giver Culture 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 Goodjobz: Challenges in Creating a Giver Culture case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Goodjobz: Challenges in Creating a Giver Culture case study is a Harvard Business School (HBR) case study written by Atul Teckchandani, Nathaniel Fischer, Gregory LaRosa, Rebecca Monroy. The Goodjobz: Challenges in Creating a Giver Culture (referred as “Giver Goodjobz” 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.

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 Goodjobz: Challenges in Creating a Giver Culture Case Study

GoodJobz was a non-profit organization that funded its job training and education programs by re-selling donated goods through its retail stores. The organization helped train over 11,000 people in 2012 and hoped to double that number within five years. To do so, the vice-president of marketing and community development believed that the organization should adopt a "giver" culture. After making significant progress in instilling a giver culture within his own department, he shifted his focus to another department: Business Services. However, the vice-president of business services hindered any efforts to do so. The vice-president of marketing and community development was faced with the challenge of how to handle this crisis. Atul Teckchandani is affiliated with California State University.

Case Authors : Atul Teckchandani, Nathaniel Fischer, Gregory LaRosa, Rebecca Monroy

Topic : Leadership & Managing People

Related Areas : Leadership

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Calculating Net Present Value (NPV) at 6% for Goodjobz: Challenges in Creating a Giver Culture Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10002445)	-10002445	-	-
Year 1	3459779	-6542666	3459779	0.9434	3263942
Year 2	3960415	-2582251	7420194	0.89	3524755
Year 3	3969837	1387586	11390031	0.8396	3333152
Year 4	3249095	4636681	14639126	0.7921	2573588
TOTAL			14639126		12695437

The Net Present Value at 6% discount rate is 2692992

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. Payback Period
2. Profitability Index
3. Net Present Value
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. Giver Goodjobz 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 Giver Goodjobz 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 Goodjobz: Challenges in Creating a Giver Culture

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 Giver Goodjobz 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 Giver Goodjobz 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	(10002445)	-10002445	-	-
Year 1	3459779	-6542666	3459779	0.8696	3008503
Year 2	3960415	-2582251	7420194	0.7561	2994643
Year 3	3969837	1387586	11390031	0.6575	2610232
Year 4	3249095	4636681	14639126	0.5718	1857681
TOTAL					10471059

The Net NPV after 4 years is 468614

(10471059 - 10002445 )

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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	(10002445)	-10002445	-	-
Year 1	3459779	-6542666	3459779	0.8333	2883149
Year 2	3960415	-2582251	7420194	0.6944	2750288
Year 3	3969837	1387586	11390031	0.5787	2297359
Year 4	3249095	4636681	14639126	0.4823	1566886
TOTAL					9497683

The Net NPV after 4 years is -504762

At 20% discount rate the NPV is negative (9497683 - 10002445 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Giver Goodjobz 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 Giver Goodjobz has a NPV value higher than Zero then finance managers at Giver Goodjobz 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 Giver Goodjobz, then the stock price of the Giver Goodjobz 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 Giver Goodjobz 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 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.

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.

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 Goodjobz: Challenges in Creating a Giver Culture

References & Further Readings

Atul Teckchandani, Nathaniel Fischer, Gregory LaRosa, Rebecca Monroy (2018), "Goodjobz: Challenges in Creating a Giver Culture Harvard Business Review Case Study. Published by HBR Publications.