The Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation 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 Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation case study is a Harvard Business School (HBR) case study written by Sammy Fung. The The Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation (referred as “Hkbu Ngo” 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, International business, Leadership, Organizational culture.

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 Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation Case Study

If one takes a look at the organization chart of the Hong Kong Blind Union ("HKBU"), one will easily notice the concept of "execution" sits prominently in the middle of the organization. Instead of calling its highest governance body the board of directors and its members directors, HKBU calls it an executive committee ("EC") and its members the executive committee members. Reporting to this EC is the executive director, who is the Union's highest-ranking employee. The titles reflect the orientation of this governance body of this small self-help nongovernmental organization ("NGO").This practice stands in stark contrast to the kind of NGO corporate governance that is prescribed by the Hong Kong government ("HKG"). Since the HKG launched its subvention approach to NGOs in Hong Kong in 2002, it has attempted to establish a code of practices for corporate governance in NGOs that are under its subvention. The code of practices advocates that NGO boards of directors should focus on areas that would ensure NGOs' legal and regulatory compliance, sound financial management, performance monitoring, and transparency. In addition, the best practice of having a diverse set of independent board members with different backgrounds and professionalism is encouraged. As one of the HKG's subvented NGOs, HKBU received 55% of its expenditure from the HKG subvention and grants in 2011-2012. As an organization that receives government funding and grants, that is, a subvented organization, HKBU is subject to the governance and audit system and framework imposed by the government. To a great extent, this governance and audit approach and framework is derived from the business sector's corporate governance practices. However, as a self-help organization for people with visual impairment, HKBU presents a compelling case for why these control and monitoring roles and practices of NGO boards should not necessarily be universally applicable to all subvented organizations in Hong Kong. Despite the HKG's guidance on the compliance and monitoring function of NGO corporate governance, HKBU sees its board, that is, the executive committee, and the Union's operation staff work closely as a unified team to achieve the NGO's missions and to facilitate fundraising. Against the backdrop of the HKG's governance advocacy, what roles and duties do HKBU's EC and its members fulfill? What are the results? And most importantly, why did HKBU adopt such practices?

Case Authors : Sammy Fung

Topic : Leadership & Managing People

Related Areas : International business, Leadership, Organizational culture

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Calculating Net Present Value (NPV) at 6% for The Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014609)	-10014609	-	-
Year 1	3460365	-6554244	3460365	0.9434	3264495
Year 2	3966741	-2587503	7427106	0.89	3530385
Year 3	3947066	1359563	11374172	0.8396	3314033
Year 4	3224197	4583760	14598369	0.7921	2553866
TOTAL			14598369		12662779

The Net Present Value at 6% discount rate is 2648170

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. Profitability Index
2. Net Present Value
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 Hkbu Ngo 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. Hkbu Ngo 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 The Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation

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 Hkbu Ngo 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 Hkbu Ngo 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	(10014609)	-10014609	-	-
Year 1	3460365	-6554244	3460365	0.8696	3009013
Year 2	3966741	-2587503	7427106	0.7561	2999426
Year 3	3947066	1359563	11374172	0.6575	2595260
Year 4	3224197	4583760	14598369	0.5718	1843445
TOTAL					10447144

The Net NPV after 4 years is 432535

(10447144 - 10014609 )

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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	(10014609)	-10014609	-	-
Year 1	3460365	-6554244	3460365	0.8333	2883638
Year 2	3966741	-2587503	7427106	0.6944	2754681
Year 3	3947066	1359563	11374172	0.5787	2284182
Year 4	3224197	4583760	14598369	0.4823	1554879
TOTAL					9477379

The Net NPV after 4 years is -537230

At 20% discount rate the NPV is negative (9477379 - 10014609 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Hkbu Ngo 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 Hkbu Ngo has a NPV value higher than Zero then finance managers at Hkbu Ngo 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 Hkbu Ngo, then the stock price of the Hkbu Ngo 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 Hkbu Ngo 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.

Understanding of risks involved in the project.

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 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.

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Negotiation Strategy of The Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation

References & Further Readings

Sammy Fung (2018), "The Hong Kong Blind Union: A Small Self-help NGO With Board Of Directors Actively Involved In Operation Harvard Business Review Case Study. Published by HBR Publications.