NetApp: The Day-to-Day of a District Manager 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 NetApp: The Day-to-Day of a District Manager case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. NetApp: The Day-to-Day of a District Manager case study is a Harvard Business School (HBR) case study written by Mark Leslie, James Lattin, Patrick Arippol. The NetApp: The Day-to-Day of a District Manager (referred as “District Quotas” 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, Conflict, Crisis management, Forecasting, IT, Sales.

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 NetApp: The Day-to-Day of a District Manager Case Study

Set in mid-2002, this case illustrates "a day in the life" of a district sales manager of a Silicon Valley company, as the technology market faced a downturn. The case enables a polarized class discussion about the tradeoffs that a new district manager might make relative to hiring / firing and setting quotas, after inheriting a mixed bag of talent in an underperforming district. It also seeks to provide with additional texture about the types of challenges and activities that such an individual would face (different from those faced by a sales representative). The case enables students to engage in discussions about four key dilemmas faced by the district manager: (a) Which representatives should he retain in his district, and which should he fire?, (b) How should he negotiate quotas/goals with his superior (regional manager), and with his representatives?, (c) Should he train an employee who will likely fall short of the company's growth goals, or replace him in hopes of hiring on a better performer?, and (d) What should Jim do about an employee who appears to insist in putting the customer's interests ahead of the company's?

Case Authors : Mark Leslie, James Lattin, Patrick Arippol

Topic : Leadership & Managing People

Related Areas : Conflict, Crisis management, Forecasting, IT, Sales

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Calculating Net Present Value (NPV) at 6% for NetApp: The Day-to-Day of a District Manager Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10024848)	-10024848	-	-
Year 1	3469537	-6555311	3469537	0.9434	3273148
Year 2	3967013	-2588298	7436550	0.89	3530627
Year 3	3966645	1378347	11403195	0.8396	3330472
Year 4	3243456	4621803	14646651	0.7921	2569121
TOTAL			14646651		12703368

The Net Present Value at 6% discount rate is 2678520

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 District Quotas 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. District Quotas 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 NetApp: The Day-to-Day of a District Manager

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 District Quotas 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 District Quotas 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	(10024848)	-10024848	-	-
Year 1	3469537	-6555311	3469537	0.8696	3016989
Year 2	3967013	-2588298	7436550	0.7561	2999632
Year 3	3966645	1378347	11403195	0.6575	2608133
Year 4	3243456	4621803	14646651	0.5718	1854456
TOTAL					10479210

The Net NPV after 4 years is 454362

(10479210 - 10024848 )

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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	(10024848)	-10024848	-	-
Year 1	3469537	-6555311	3469537	0.8333	2891281
Year 2	3967013	-2588298	7436550	0.6944	2754870
Year 3	3966645	1378347	11403195	0.5787	2295512
Year 4	3243456	4621803	14646651	0.4823	1564167
TOTAL					9505830

The Net NPV after 4 years is -519018

At 20% discount rate the NPV is negative (9505830 - 10024848 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of District Quotas 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 District Quotas has a NPV value higher than Zero then finance managers at District Quotas 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 District Quotas, then the stock price of the District Quotas 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 District Quotas 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 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.

Understanding of risks involved in the project.

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.

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 NetApp: The Day-to-Day of a District Manager

References & Further Readings

Mark Leslie, James Lattin, Patrick Arippol (2018), "NetApp: The Day-to-Day of a District Manager Harvard Business Review Case Study. Published by HBR Publications.