Why Pass on Viral Messages? Because They Connect Emotionally 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 Why Pass on Viral Messages? Because They Connect Emotionally case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Why Pass on Viral Messages? Because They Connect Emotionally case study is a Harvard Business School (HBR) case study written by Angela Dobele, Adam Lindgreen, Michael Beverland, Joelle Vanhamme. The Why Pass on Viral Messages? Because They Connect Emotionally (referred as “Viral Recipients” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Psychology.

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 Why Pass on Viral Messages? Because They Connect Emotionally Case Study

Postulates that successful viral marketing campaigns trigger an emotional response in recipients. Working under this premise, examines the effects of viral messages containing the six primary emotions (surprise, joy, sadness, anger, fear, and disgust) on recipients' emotional responses to viral marketing campaigns and subsequent forwarding behavior. According to findings, in order to be effective, viral messages need to contain the element of surprise. By itself, however, surprise is not enough to guarantee message success; therefore, it must be combined with other emotions. The effectiveness of the viral message is also moderated by gender, with disgust-based and fear-based campaigns being more likely to be forwarded by male recipients than female recipients. To ensure forwarding behavior, the message must capture the imagination of the recipient, as well as be clearly targeted. Moreover, achieving fit between a campaign and the featured emotions is important, as this ensures an increased chance of forwarding. In addition to relaying these and other findings, shares and discusses the managerial implications of using different emotions in viral marketing campaigns. Finally, culture is recognized as an influencer.

Case Authors : Angela Dobele, Adam Lindgreen, Michael Beverland, Joelle Vanhamme

Topic : Sales & Marketing

Related Areas : Psychology

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Calculating Net Present Value (NPV) at 6% for Why Pass on Viral Messages? Because They Connect Emotionally Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016763)	-10016763	-	-
Year 1	3452221	-6564542	3452221	0.9434	3256812
Year 2	3969302	-2595240	7421523	0.89	3532665
Year 3	3936154	1340914	11357677	0.8396	3304871
Year 4	3242983	4583897	14600660	0.7921	2568746
TOTAL			14600660		12663094

The Net Present Value at 6% discount rate is 2646331

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. Internal Rate of Return
2. Net Present Value
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. Timing of the expected cash flows – stockholders of Viral Recipients 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. Viral Recipients 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 Why Pass on Viral Messages? Because They Connect Emotionally

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 Viral Recipients 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 Viral Recipients 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	(10016763)	-10016763	-	-
Year 1	3452221	-6564542	3452221	0.8696	3001931
Year 2	3969302	-2595240	7421523	0.7561	3001363
Year 3	3936154	1340914	11357677	0.6575	2588085
Year 4	3242983	4583897	14600660	0.5718	1854186
TOTAL					10445565

The Net NPV after 4 years is 428802

(10445565 - 10016763 )

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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	(10016763)	-10016763	-	-
Year 1	3452221	-6564542	3452221	0.8333	2876851
Year 2	3969302	-2595240	7421523	0.6944	2756460
Year 3	3936154	1340914	11357677	0.5787	2277867
Year 4	3242983	4583897	14600660	0.4823	1563939
TOTAL					9475116

The Net NPV after 4 years is -541647

At 20% discount rate the NPV is negative (9475116 - 10016763 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Viral Recipients 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 Viral Recipients has a NPV value higher than Zero then finance managers at Viral Recipients 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 Viral Recipients, then the stock price of the Viral Recipients 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 Viral Recipients 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.

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.

Understanding of risks involved in the project.

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 Why Pass on Viral Messages? Because They Connect Emotionally

References & Further Readings

Angela Dobele, Adam Lindgreen, Michael Beverland, Joelle Vanhamme (2018), "Why Pass on Viral Messages? Because They Connect Emotionally Harvard Business Review Case Study. Published by HBR Publications.