Crossing the Line: Don Imus and the Rutgers Women's Basketball Team 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 Crossing the Line: Don Imus and the Rutgers Women's Basketball Team case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Crossing the Line: Don Imus and the Rutgers Women's Basketball Team case study is a Harvard Business School (HBR) case study written by Esther Scott, Alex Jones. The Crossing the Line: Don Imus and the Rutgers Women's Basketball Team (referred as “Imus Rutgers” 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, Crisis management, Demographics, Economy, Internet, Personnel policies, Public relations, Strategy.

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 Crossing the Line: Don Imus and the Rutgers Women's Basketball Team Case Study

On April 4, 2007, talk show host Don Imus, while chatting with his sidekicks on his morning radio program, referred to the Rutgers women's basketball team-which had lost a college championship game the previous evening-as "nappy-headed hos." This was not the first time that Imus and the regulars on his show-which was nationally syndicated by CBS Radio and simulcast on MSNBC-had ed racial and sexual innuendo into their early morning banter. "Imus in the Morning" had long been a show that alternated serious conversation with prominent politicians and journalists with crass locker-room humor and gibes directed at homosexuals, blacks, Jews, and other ethnic minorities, most of them figures in sports, entertainment, or politics. In the past, Imus had weathered occasional protests against his insulting brand of humor, but this time would be different. His remark about the Rutgers team was picked up by a liberal media watchdog group and posted, with an accompanying video clip, on its website and, later, on YouTube. Almost immediately, there was an outcry from black organizations and leaders, and calls for Imus to be fired. An apology by Imus did nothing to quiet critics, as other groups and individuals began to clamor for him to be taken off the air. Media coverage, spotty at first, expanded as protest grew more vocal. In a little over a week, the controversy came to a head. With advertisers bailing out and critics unappeased by apologies and a two-week suspension, NBC, and CBS abruptly canceled the long-running show. HKS Case Number 1920.0

Case Authors : Esther Scott, Alex Jones

Topic : Leadership & Managing People

Related Areas : Crisis management, Demographics, Economy, Internet, Personnel policies, Public relations, Strategy

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Calculating Net Present Value (NPV) at 6% for Crossing the Line: Don Imus and the Rutgers Women's Basketball Team Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10003163)	-10003163	-	-
Year 1	3457834	-6545329	3457834	0.9434	3262108
Year 2	3954421	-2590908	7412255	0.89	3519421
Year 3	3968674	1377766	11380929	0.8396	3332175
Year 4	3238666	4616432	14619595	0.7921	2565327
TOTAL			14619595		12679030

The Net Present Value at 6% discount rate is 2675867

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

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 Imus Rutgers 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. Imus Rutgers 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 Crossing the Line: Don Imus and the Rutgers Women's Basketball Team

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 Imus Rutgers 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 Imus Rutgers 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	(10003163)	-10003163	-	-
Year 1	3457834	-6545329	3457834	0.8696	3006812
Year 2	3954421	-2590908	7412255	0.7561	2990110
Year 3	3968674	1377766	11380929	0.6575	2609468
Year 4	3238666	4616432	14619595	0.5718	1851718
TOTAL					10458108

The Net NPV after 4 years is 454945

(10458108 - 10003163 )

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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	(10003163)	-10003163	-	-
Year 1	3457834	-6545329	3457834	0.8333	2881528
Year 2	3954421	-2590908	7412255	0.6944	2746126
Year 3	3968674	1377766	11380929	0.5787	2296686
Year 4	3238666	4616432	14619595	0.4823	1561857
TOTAL					9486197

The Net NPV after 4 years is -516966

At 20% discount rate the NPV is negative (9486197 - 10003163 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Imus Rutgers 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 Imus Rutgers has a NPV value higher than Zero then finance managers at Imus Rutgers 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 Imus Rutgers, then the stock price of the Imus Rutgers 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 Imus Rutgers 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 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 will be a multi year spillover effect of various taxation regulations.

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 Crossing the Line: Don Imus and the Rutgers Women's Basketball Team

References & Further Readings

Esther Scott, Alex Jones (2018), "Crossing the Line: Don Imus and the Rutgers Women's Basketball Team Harvard Business Review Case Study. Published by HBR Publications.