×




Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B) 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 Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B) case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B) case study is a Harvard Business School (HBR) case study written by Paul J Simko, Marc W. Modica, Gerry Yemen. The Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B) (referred as “Rankin Games” 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, Corporate governance, International business, Negotiations.

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 Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B) Case Study


Whether taught to students unfamiliar with U.S. business culture or to students unacquainted with working in China, this case allows for an exploration of values that shape attitudes and behaviors in both countries. The material presents one executive's unique leadership experience in managing across cultures. From creating cross-cultural teams to balancing the goals of corporate in the United States and local operations in China, Owen Rankin's role as a leader in the middle is rich with experiences dealing with preconceived notions. The case works as a source for any manager working outside his or her home country. In the (A) case Owen Rankin, VP of corporate reputation at Johnson & Johnson (J&J), is appointed to head up J&J's Olympic Games committee. He was tasked with convincing others in the organization to move forward on the project. . Rankin and his team spent months going back and forth to China, meeting with J&J business-unit leaders, and trying to persuade them to support the project. The (A) case ends at Rankin and his core committee back in China at their final decision-making meeting-would it be a go or a no-go decision? The (B) case presents Rankin's experience to build a team, engage stakeholders, develop and activate programs, attend the games, and then wrap up the closing of the sponsorship. As Rankin and his team supervised the dismantling of the event, thoughts turned to the next Olympic Games in Vancouver, Canada, and London, England. Should J&J continue to be a sponsor?


Case Authors : Paul J Simko, Marc W. Modica, Gerry Yemen

Topic : Leadership & Managing People

Related Areas : Corporate governance, International business, Negotiations




Calculating Net Present Value (NPV) at 6% for Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B) Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10025849) -10025849 - -
Year 1 3472936 -6552913 3472936 0.9434 3276355
Year 2 3982321 -2570592 7455257 0.89 3544252
Year 3 3951597 1381005 11406854 0.8396 3317837
Year 4 3238422 4619427 14645276 0.7921 2565134
TOTAL 14645276 12703577




The Net Present Value at 6% discount rate is 2677728

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. Net Present Value
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 Rankin Games 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. Rankin Games 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 Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B)

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 Rankin Games 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 Rankin Games 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 (10025849) -10025849 - -
Year 1 3472936 -6552913 3472936 0.8696 3019944
Year 2 3982321 -2570592 7455257 0.7561 3011207
Year 3 3951597 1381005 11406854 0.6575 2598239
Year 4 3238422 4619427 14645276 0.5718 1851578
TOTAL 10480969


The Net NPV after 4 years is 455120

(10480969 - 10025849 )








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 (10025849) -10025849 - -
Year 1 3472936 -6552913 3472936 0.8333 2894113
Year 2 3982321 -2570592 7455257 0.6944 2765501
Year 3 3951597 1381005 11406854 0.5787 2286804
Year 4 3238422 4619427 14645276 0.4823 1561739
TOTAL 9508157


The Net NPV after 4 years is -517692

At 20% discount rate the NPV is negative (9508157 - 10025849 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Rankin Games 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 Rankin Games has a NPV value higher than Zero then finance managers at Rankin Games 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 Rankin Games, then the stock price of the Rankin Games 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 Rankin Games 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.

What can impact the cash flow of the project.

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.

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 Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B)

References & Further Readings

Paul J Simko, Marc W. Modica, Gerry Yemen (2018), "Owen Rankin at J&J and the Olympic Games: Let the Games Begin (B) Harvard Business Review Case Study. Published by HBR Publications.


99 Wuxian SWOT Analysis / TOWS Matrix

Services , Business Services


Sumitomo Chemical SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


KH Neochem SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


Appian SWOT Analysis / TOWS Matrix

Technology , Software & Programming


Shinnaigai Textile SWOT Analysis / TOWS Matrix

Consumer Cyclical , Textiles - Non Apparel


Tiffany&Co SWOT Analysis / TOWS Matrix

Services , Retail (Specialty)


Conduit Capital Ltd SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Blue Sky Uranium SWOT Analysis / TOWS Matrix

Basic Materials , Metal Mining


Arrium SWOT Analysis / TOWS Matrix

Basic Materials , Iron & Steel