Blogging: A New Play in Your Marketing Game Plan 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 Blogging: A New Play in Your Marketing Game Plan case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Blogging: A New Play in Your Marketing Game Plan case study is a Harvard Business School (HBR) case study written by Tanuja Singh, Liza Veron-Jackson, Joe Cullinane. The Blogging: A New Play in Your Marketing Game Plan (referred as “Blogs Relationship” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, IT, Marketing.

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 Blogging: A New Play in Your Marketing Game Plan Case Study

The emergence, proliferation, and ubiquity of the Internet have not only transformed businesses, but also altered the relationship between the business and the customer. Recent advances in technology have helped to migrate this relationship to an interactive level where technology contributes to brand building by creating and sustaining a long-term relationship with the customer. Media fragmentation and customer indifference to traditional marketing tools are forcing marketers to seek new opportunities so the marketing message not only captures customers' attention, but also tries to engage them with the company. This paper discusses blogs within the context of creating this new, more enduring relationship with the customer. Blogs are discussed within the framework of Web 2.0, the next generation of the Internet, which is comprised of user-generated content and social computing. The use of blogs by several companies as tools to better engage the customer in the creation, delivery, and dissemination of marketing messages is also demonstrated.

Case Authors : Tanuja Singh, Liza Veron-Jackson, Joe Cullinane

Topic : Sales & Marketing

Related Areas : IT, Marketing

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Calculating Net Present Value (NPV) at 6% for Blogging: A New Play in Your Marketing Game Plan Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10018358)	-10018358	-	-
Year 1	3461528	-6556830	3461528	0.9434	3265592
Year 2	3970678	-2586152	7432206	0.89	3533889
Year 3	3946929	1360777	11379135	0.8396	3313918
Year 4	3228325	4589102	14607460	0.7921	2557136
TOTAL			14607460		12670535

The Net Present Value at 6% discount rate is 2652177

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. Payback Period
3. Net Present Value
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 Blogs Relationship 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. Blogs Relationship 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 Blogging: A New Play in Your Marketing Game Plan

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 Blogs Relationship 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 Blogs Relationship 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	(10018358)	-10018358	-	-
Year 1	3461528	-6556830	3461528	0.8696	3010024
Year 2	3970678	-2586152	7432206	0.7561	3002403
Year 3	3946929	1360777	11379135	0.6575	2595170
Year 4	3228325	4589102	14607460	0.5718	1845805
TOTAL					10453403

The Net NPV after 4 years is 435045

(10453403 - 10018358 )

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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	(10018358)	-10018358	-	-
Year 1	3461528	-6556830	3461528	0.8333	2884607
Year 2	3970678	-2586152	7432206	0.6944	2757415
Year 3	3946929	1360777	11379135	0.5787	2284102
Year 4	3228325	4589102	14607460	0.4823	1556870
TOTAL					9482994

The Net NPV after 4 years is -535364

At 20% discount rate the NPV is negative (9482994 - 10018358 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Blogs Relationship 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 Blogs Relationship has a NPV value higher than Zero then finance managers at Blogs Relationship 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 Blogs Relationship, then the stock price of the Blogs Relationship 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 Blogs Relationship 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 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.

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.

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 Blogging: A New Play in Your Marketing Game Plan

References & Further Readings

Tanuja Singh, Liza Veron-Jackson, Joe Cullinane (2018), "Blogging: A New Play in Your Marketing Game Plan Harvard Business Review Case Study. Published by HBR Publications.