Too Hot to Handle? How to ManageRelationship Conflict 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 Too Hot to Handle? How to ManageRelationship Conflict case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Too Hot to Handle? How to ManageRelationship Conflict case study is a Harvard Business School (HBR) case study written by Amy C. Edmondson, Diana McLain Smith. The Too Hot to Handle? How to ManageRelationship Conflict (referred as “Hot Conflict” 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, Communication, Conflict, Human resource management, Leading teams.

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 Too Hot to Handle? How to ManageRelationship Conflict Case Study

Conventional wisdom, together with the weight of published management advice, recommends that management teams engage task conflict directly but avoid relationship conflict. Implicit in this advice is the premise that it is indeed possible to separate the task and the relationship aspects of a business conflict. Argues that this separation is not always possible for management teams. When teams discuss "hot topics," substantive disagreements (task conflicts) tend to trigger negative attributions about others' motives or abilities (a key element of relationship conflicts). When this happens, most managers suppress their true thoughts, thus avoiding genuine discussion. Yet, when interpersonal attributions are suppressed, they tend to leak into the business conversation anyway, such as in the form of implied accusations or aggravated tones of voice. These dynamics are virtually inevitable, even when managers try hard to avoid them. Making a distinction between "hot" and "cool" topics can help clarify when avoiding discussion of relationship conflict in management teams is feasible and when it's not. In addition, management teams facing hot topics need to learn to handle relationship conflicts productively, despite the heightened emotions and interpersonal tensions associated with them.

Case Authors : Amy C. Edmondson, Diana McLain Smith

Topic : Leadership & Managing People

Related Areas : Communication, Conflict, Human resource management, Leading teams

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Calculating Net Present Value (NPV) at 6% for Too Hot to Handle? How to ManageRelationship Conflict Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009333)	-10009333	-	-
Year 1	3456679	-6552654	3456679	0.9434	3261018
Year 2	3976190	-2576464	7432869	0.89	3538795
Year 3	3966172	1389708	11399041	0.8396	3330074
Year 4	3224007	4613715	14623048	0.7921	2553716
TOTAL			14623048		12683603

The Net Present Value at 6% discount rate is 2674270

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Hot Conflict 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 Hot Conflict 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 Too Hot to Handle? How to ManageRelationship Conflict

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 Hot Conflict 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 Hot Conflict 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	(10009333)	-10009333	-	-
Year 1	3456679	-6552654	3456679	0.8696	3005808
Year 2	3976190	-2576464	7432869	0.7561	3006571
Year 3	3966172	1389708	11399041	0.6575	2607822
Year 4	3224007	4613715	14623048	0.5718	1843336
TOTAL					10463538

The Net NPV after 4 years is 454205

(10463538 - 10009333 )

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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	(10009333)	-10009333	-	-
Year 1	3456679	-6552654	3456679	0.8333	2880566
Year 2	3976190	-2576464	7432869	0.6944	2761243
Year 3	3966172	1389708	11399041	0.5787	2295238
Year 4	3224007	4613715	14623048	0.4823	1554787
TOTAL					9491835

The Net NPV after 4 years is -517498

At 20% discount rate the NPV is negative (9491835 - 10009333 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Hot Conflict 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 Hot Conflict has a NPV value higher than Zero then finance managers at Hot Conflict 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 Hot Conflict, then the stock price of the Hot Conflict 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 Hot Conflict 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 uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

Understanding of risks involved in 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.

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 Too Hot to Handle? How to ManageRelationship Conflict

References & Further Readings

Amy C. Edmondson, Diana McLain Smith (2018), "Too Hot to Handle? How to ManageRelationship Conflict Harvard Business Review Case Study. Published by HBR Publications.