Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia 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 Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia case study is a Harvard Business School (HBR) case study written by Rosabeth Moss Kanter, Juliane Calingo Schwetz, Patricia Bissett Higgins. The Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia (referred as “Yoda Clinked” 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, Change management, Ethics, Gender, Growth strategy, International business, Leadership, Social responsibility.

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 Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia Case Study

In 2011, Junko Yoda with Pam McCambridge launched CLinked, a venture aimed to reduce human trafficking of women and children for sexual exploitation. Since incorporation, they launched several different pilot programs in partnership with local non-governmental organizations (NGOs) in Lampung, Indonesia where they also encountered a number of challenges ranging from a lack of trust within the local community to diminishing financial resources. Yoda struggled with the best approach to the large and complex issue, but started to gravitate towards developing replicable programs using art that positively impacted a small number of victims in high-risk communities. In 2013, Yoda wondered how she would grow CLinked and ensure its future.

Case Authors : Rosabeth Moss Kanter, Juliane Calingo Schwetz, Patricia Bissett Higgins

Topic : Leadership & Managing People

Related Areas : Change management, Ethics, Gender, Growth strategy, International business, Leadership, Social responsibility

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Calculating Net Present Value (NPV) at 6% for Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10010796)	-10010796	-	-
Year 1	3446889	-6563907	3446889	0.9434	3251782
Year 2	3980027	-2583880	7426916	0.89	3542210
Year 3	3948573	1364693	11375489	0.8396	3315298
Year 4	3235849	4600542	14611338	0.7921	2563095
TOTAL			14611338		12672385

The Net Present Value at 6% discount rate is 2661589

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. Internal Rate of Return
4. Profitability Index

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 Yoda Clinked 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. Yoda Clinked 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 Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia

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 Yoda Clinked 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 Yoda Clinked 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	(10010796)	-10010796	-	-
Year 1	3446889	-6563907	3446889	0.8696	2997295
Year 2	3980027	-2583880	7426916	0.7561	3009472
Year 3	3948573	1364693	11375489	0.6575	2596251
Year 4	3235849	4600542	14611338	0.5718	1850107
TOTAL					10453125

The Net NPV after 4 years is 442329

(10453125 - 10010796 )

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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	(10010796)	-10010796	-	-
Year 1	3446889	-6563907	3446889	0.8333	2872408
Year 2	3980027	-2583880	7426916	0.6944	2763908
Year 3	3948573	1364693	11375489	0.5787	2285054
Year 4	3235849	4600542	14611338	0.4823	1560498
TOTAL					9481867

The Net NPV after 4 years is -528929

At 20% discount rate the NPV is negative (9481867 - 10010796 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Yoda Clinked 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 Yoda Clinked has a NPV value higher than Zero then finance managers at Yoda Clinked 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 Yoda Clinked, then the stock price of the Yoda Clinked 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 Yoda Clinked 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

Understanding of risks involved in 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 Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia

References & Further Readings

Rosabeth Moss Kanter, Juliane Calingo Schwetz, Patricia Bissett Higgins (2018), "Junko Yoda and Her Collaboration to Address Sex Trafficking in Asia Harvard Business Review Case Study. Published by HBR Publications.