Navigating the Politics and Emotions of Change 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 Navigating the Politics and Emotions of Change case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Navigating the Politics and Emotions of Change case study is a Harvard Business School (HBR) case study written by Ellen R. Auster, Trish Ruebottom. The Navigating the Politics and Emotions of Change (referred as “Skeptics Change” 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

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Case Description of Navigating the Politics and Emotions of Change Case Study

This is an MIT Sloan Management Review article. In today's fast-paced business world, leaders know that their organization's success is tightly linked to its ability to change again and again. Yet many change initiatives fail. One reason, the authors say, is that leaders often underestimate the impact of the politics and emotions of change. The authors suggest a five-step process for leading a major change initiative: Step 1: Map the political landscape. Map the key external and internal, formal and informal stakeholders who will be affected by the change. Step 2: Identify the key influencers within each stakeholder group. Once the key stakeholder groups are mapped, leaders should identify the key influencers within each group. Key influencers are those individuals who might be able to marshal resources, enroll others, build legitimacy and momentum, and provide ideas crucial to driving the change. Step 3: Assess influencers'receptiveness to change. People have different levels of receptiveness to a given change. Both supporters and skeptics must be engaged. Step 4: Mobilize influential sponsors and promoters. Sponsors have access to financial and human resources. Promoters, on the other hand, can be extremely useful in igniting the enthusiasm that can draw fence-sitters into the process and propel change forward. Step 5: Engage influential positive and negative skeptics. Skeptics can either make a change process more effective or turn a minor hurdle into a major roadblock. Positive skeptics may offer important perspectives and insights about the vulnerabilities of proposed changes. Influential negative skeptics are also important to work with.

Case Authors : Ellen R. Auster, Trish Ruebottom

Topic : Leadership & Managing People

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Navigating the Politics and Emotions of Change Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10020852)	-10020852	-	-
Year 1	3471222	-6549630	3471222	0.9434	3274738
Year 2	3971684	-2577946	7442906	0.89	3534785
Year 3	3968815	1390869	11411721	0.8396	3332294
Year 4	3226022	4616891	14637743	0.7921	2555312
TOTAL			14637743		12697128

The Net Present Value at 6% discount rate is 2676276

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. Internal Rate of Return
3. Payback Period
4. Profitability Index

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. Skeptics Change 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 Skeptics Change 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 Navigating the Politics and Emotions of Change

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 Skeptics Change 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 Skeptics Change 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	(10020852)	-10020852	-	-
Year 1	3471222	-6549630	3471222	0.8696	3018454
Year 2	3971684	-2577946	7442906	0.7561	3003164
Year 3	3968815	1390869	11411721	0.6575	2609560
Year 4	3226022	4616891	14637743	0.5718	1844489
TOTAL					10475666

The Net NPV after 4 years is 454814

(10475666 - 10020852 )

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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	(10020852)	-10020852	-	-
Year 1	3471222	-6549630	3471222	0.8333	2892685
Year 2	3971684	-2577946	7442906	0.6944	2758114
Year 3	3968815	1390869	11411721	0.5787	2296768
Year 4	3226022	4616891	14637743	0.4823	1555759
TOTAL					9503326

The Net NPV after 4 years is -517526

At 20% discount rate the NPV is negative (9503326 - 10020852 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Skeptics Change 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 Skeptics Change has a NPV value higher than Zero then finance managers at Skeptics Change 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 Skeptics Change, then the stock price of the Skeptics Change 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 Skeptics Change 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 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 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.

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 Navigating the Politics and Emotions of Change

References & Further Readings

Ellen R. Auster, Trish Ruebottom (2018), "Navigating the Politics and Emotions of Change Harvard Business Review Case Study. Published by HBR Publications.