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Training and Development at RVA: A Nonprofit Organization 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 Training and Development at RVA: A Nonprofit Organization case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Training and Development at RVA: A Nonprofit Organization case study is a Harvard Business School (HBR) case study written by Zunaira Saqib. The Training and Development at RVA: A Nonprofit Organization (referred as “Training Project” 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, 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




Case Description of Training and Development at RVA: A Nonprofit Organization Case Study


The case is about a non-profit organization located in Manchester, England. As a regional association helping smaller voluntary organizations and groups survive and grow, the organization itself depends on fundraising and donations and runs on project-based funding. The projects normally run for three to five years. Hiring and training new employees every two to three months is common. Due to project timelines, employees leave as soon as they find another job. Many complain about the lack of development opportunities within the organization. The chief executive officer has seven people working for him and needs to make a plan to retain his employees for the whole life of each project. For this purpose, he has decided to devise training and development programs for them. There are different options available for this purpose, each with pros and cons. Considering scarce funding, small project tenure, and his goal to provide fair opportunities for all, he must decide which option best fits his organization's needs and resources.


Case Authors : Zunaira Saqib

Topic : Leadership & Managing People

Related Areas : Organizational culture




Calculating Net Present Value (NPV) at 6% for Training and Development at RVA: A Nonprofit Organization Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10001694) -10001694 - -
Year 1 3446625 -6555069 3446625 0.9434 3251533
Year 2 3975947 -2579122 7422572 0.89 3538579
Year 3 3957256 1378134 11379828 0.8396 3322588
Year 4 3228594 4606728 14608422 0.7921 2557349
TOTAL 14608422 12670049


The Net Present Value at 6% discount rate is 2668355

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. Internal Rate of Return
2. Payback Period
3. Profitability Index
4. Net Present Value

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. Training Project 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 Training Project have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of Training and Development at RVA: A Nonprofit Organization

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 Training Project 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 Training Project 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 (10001694) -10001694 - -
Year 1 3446625 -6555069 3446625 0.8696 2997065
Year 2 3975947 -2579122 7422572 0.7561 3006387
Year 3 3957256 1378134 11379828 0.6575 2601960
Year 4 3228594 4606728 14608422 0.5718 1845959
TOTAL 10451372


The Net NPV after 4 years is 449678

(10451372 - 10001694 )






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 (10001694) -10001694 - -
Year 1 3446625 -6555069 3446625 0.8333 2872188
Year 2 3975947 -2579122 7422572 0.6944 2761074
Year 3 3957256 1378134 11379828 0.5787 2290079
Year 4 3228594 4606728 14608422 0.4823 1556999
TOTAL 9480340


The Net NPV after 4 years is -521354

At 20% discount rate the NPV is negative (9480340 - 10001694 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Training Project 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 Training Project has a NPV value higher than Zero then finance managers at Training Project 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 Training Project, then the stock price of the Training Project 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 Training Project 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 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.

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.




References & Further Readings

Zunaira Saqib (2018), "Training and Development at RVA: A Nonprofit Organization Harvard Business Review Case Study. Published by HBR Publications.