×




SEWA (A): Ela Bhatt 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 SEWA (A): Ela Bhatt case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. SEWA (A): Ela Bhatt case study is a Harvard Business School (HBR) case study written by Sonia Mehrotra, Oana Branzei. The SEWA (A): Ela Bhatt (referred as “Bhatt Ela” 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, .

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 SEWA (A): Ela Bhatt Case Study


In February 2014, a McKinsey Global Institute report proposed tracking an empowerment line that could enable India's citizens to get out of poverty by providing the resources they needed to build better lives. This prompted Ela Bhatt, founder of the India-based Self-Employed Women's Association, to take stock of her initiative to empower women working in India's informal sector. Since 1972, her organization has been widely acclaimed as a global first mover and active champion of grassroots development. Quickly approaching two million members in India and six neighbouring countries, and inspiring similar efforts in South Africa, Ghana, Mali and Burkina Faso, it exemplifies a unique form of positively deviant organizing by speaking to the centrality of human beings at work. Given resources, support and encouragement, its many members have used their own human agency even in the direst of circumstances to better their lives in ways most meaningful to them, for instance, by creating childcare, health care, banking, farming and education cooperatives. However, as she reaches retirement and contemplates the future, Bhatt wonders if the new generation of Indian leaders will take up the Gandhian socially minded path or follow the commercial careers opening up in the country's multinational sector.


Case Authors : Sonia Mehrotra, Oana Branzei

Topic : Leadership & Managing People

Related Areas :




Calculating Net Present Value (NPV) at 6% for SEWA (A): Ela Bhatt Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10004289) -10004289 - -
Year 1 3449969 -6554320 3449969 0.9434 3254688
Year 2 3978355 -2575965 7428324 0.89 3540722
Year 3 3951735 1375770 11380059 0.8396 3317953
Year 4 3234031 4609801 14614090 0.7921 2561655
TOTAL 14614090 12675018




The Net Present Value at 6% discount rate is 2670729

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. Net Present Value
2. Internal Rate of Return
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 Bhatt Ela 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. Bhatt Ela 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 SEWA (A): Ela Bhatt

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 Bhatt Ela 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 Bhatt Ela 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 (10004289) -10004289 - -
Year 1 3449969 -6554320 3449969 0.8696 2999973
Year 2 3978355 -2575965 7428324 0.7561 3008208
Year 3 3951735 1375770 11380059 0.6575 2598330
Year 4 3234031 4609801 14614090 0.5718 1849068
TOTAL 10455579


The Net NPV after 4 years is 451290

(10455579 - 10004289 )








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 (10004289) -10004289 - -
Year 1 3449969 -6554320 3449969 0.8333 2874974
Year 2 3978355 -2575965 7428324 0.6944 2762747
Year 3 3951735 1375770 11380059 0.5787 2286884
Year 4 3234031 4609801 14614090 0.4823 1559621
TOTAL 9484226


The Net NPV after 4 years is -520063

At 20% discount rate the NPV is negative (9484226 - 10004289 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Bhatt Ela 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 Bhatt Ela has a NPV value higher than Zero then finance managers at Bhatt Ela 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 Bhatt Ela, then the stock price of the Bhatt Ela 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 Bhatt Ela 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.

Understanding of risks involved in the project.

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

What can impact the cash flow of 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.

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 SEWA (A): Ela Bhatt

References & Further Readings

Sonia Mehrotra, Oana Branzei (2018), "SEWA (A): Ela Bhatt Harvard Business Review Case Study. Published by HBR Publications.


BIG SWOT Analysis / TOWS Matrix

Services , Rental & Leasing


Veeko Intl SWOT Analysis / TOWS Matrix

Consumer Cyclical , Apparel/Accessories


GameStop Corp SWOT Analysis / TOWS Matrix

Services , Retail (Technology)


EQTEC PLC SWOT Analysis / TOWS Matrix

Utilities , Electric Utilities


Yunnan Yuntianhua SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


EIH SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Sanli Environmental SWOT Analysis / TOWS Matrix

Capital Goods , Construction Services


Ktis SWOT Analysis / TOWS Matrix

Services , Business Services