Onefinestay: Building a Luxury Experience in the Sharing Economy 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 Onefinestay: Building a Luxury Experience in the Sharing Economy case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Onefinestay: Building a Luxury Experience in the Sharing Economy case study is a Harvard Business School (HBR) case study written by Jill Avery, Anat Keinan, Liz Kind. The Onefinestay: Building a Luxury Experience in the Sharing Economy (referred as “Cresswell Onefinestay” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customer service, Disruptive innovation, Entrepreneurship, Public relations.

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 Onefinestay: Building a Luxury Experience in the Sharing Economy Case Study

Miranda Cresswell, marketing director, and Greg Marsh, founder and CEO of onefinestay, were grappling with branding and positioning dilemmas. onefinestay offered high-end home rentals to travelers who sought a more authentic and local experience than a typical upscale hotel might provide. onefinestay's brand had been "hacked" together quickly during the company's early years. After five years of rapid growth, Marsh brought Cresswell on board to do a comprehensive analysis of the company's brand and its positioning in the marketplace. Cresswell had spent several months gathering data and insights, and was starting to experiment with use case scenarios that took a crack at segmenting the company's customers. The preliminary results were interesting, but raised more questions than they answered, and Cresswell wondered if this was the best way to segment the market. While segmenting in this way was intriguing, it led to a branding challenge-as a start-up, it was difficult for onefinestay to have the resources to support multiple brand messages in the marketplace and different segments wanted different things from their travel experience. She pondered whether there were other ways to group customers that would allow for a more universal positioning for the brand or whether the company needed to focus on one or two segments to serve. Positioning the fledgling brand was a challenge. Who was the company competing against and how could it carve out a unique value proposition that would appeal to travelers and be differentiated from what was offered by other hospitality options? Was its current moniker "the unhotel" working for or against it? This case includes the topic of luxury.

Case Authors : Jill Avery, Anat Keinan, Liz Kind

Topic : Sales & Marketing

Related Areas : Customer service, Disruptive innovation, Entrepreneurship, Public relations

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Calculating Net Present Value (NPV) at 6% for Onefinestay: Building a Luxury Experience in the Sharing Economy Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10029638)	-10029638	-	-
Year 1	3466465	-6563173	3466465	0.9434	3270250
Year 2	3965367	-2597806	7431832	0.89	3529163
Year 3	3951484	1353678	11383316	0.8396	3317742
Year 4	3235965	4589643	14619281	0.7921	2563187
TOTAL			14619281		12680342

The Net Present Value at 6% discount rate is 2650704

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. Profitability Index
3. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Cresswell Onefinestay 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 Cresswell Onefinestay 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 Onefinestay: Building a Luxury Experience in the Sharing Economy

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 Sales & Marketing 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 Cresswell Onefinestay 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 Cresswell Onefinestay 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	(10029638)	-10029638	-	-
Year 1	3466465	-6563173	3466465	0.8696	3014317
Year 2	3965367	-2597806	7431832	0.7561	2998387
Year 3	3951484	1353678	11383316	0.6575	2598165
Year 4	3235965	4589643	14619281	0.5718	1850173
TOTAL					10461043

The Net NPV after 4 years is 431405

(10461043 - 10029638 )

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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	(10029638)	-10029638	-	-
Year 1	3466465	-6563173	3466465	0.8333	2888721
Year 2	3965367	-2597806	7431832	0.6944	2753727
Year 3	3951484	1353678	11383316	0.5787	2286738
Year 4	3235965	4589643	14619281	0.4823	1560554
TOTAL					9489740

The Net NPV after 4 years is -539898

At 20% discount rate the NPV is negative (9489740 - 10029638 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Cresswell Onefinestay 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 Cresswell Onefinestay has a NPV value higher than Zero then finance managers at Cresswell Onefinestay 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 Cresswell Onefinestay, then the stock price of the Cresswell Onefinestay 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 Cresswell Onefinestay 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 –

Understanding of risks involved in the project.

What can impact the cash flow of 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 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 Onefinestay: Building a Luxury Experience in the Sharing Economy

References & Further Readings

Jill Avery, Anat Keinan, Liz Kind (2018), "Onefinestay: Building a Luxury Experience in the Sharing Economy Harvard Business Review Case Study. Published by HBR Publications.