Blue Origin, NASA, and New Space (A) 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 Blue Origin, NASA, and New Space (A) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Blue Origin, NASA, and New Space (A) case study is a Harvard Business School (HBR) case study written by Matthew C. Weinzierl, Angela Acocella. The Blue Origin, NASA, and New Space (A) (referred as “Nasa Blue” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Financial analysis, Government, Joint ventures.

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 Blue Origin, NASA, and New Space (A) Case Study

Jeff Bezos, six years after starting a revolution in retailing with Amazon.com, turned his life-long passion for space into a start-up, Blue Origin. Blue (as it was called) was a part of the New Space industry, a collection of startup aerospace engineering companies that were intent on disrupting the American space sector with new technologies, management approaches, and competitive pressure. NASA hoped to leverage New Space to outsource its near-Earth activities and refocus its own efforts on deep space exploration. One of the agency's main mechanisms for this shift of activities was its Commercial Crew Development program (CCDev), a multi-phase initiative launched in 2009. Blue participated in the first two rounds of CCDev, and by all accounts these had been win-win experiences for it and NASA. The decision point of the case is whether Blue should participate in the third, much larger and more complex, stage of CCDev. The tradeoff facing Blue's leadership was between the legitimacy, expertise, and funding provided by working with NASA and the autonomy, efficiency, and independence threatened by working with NASA. How would Blue, with its clear respect for NASA but its desire (and financial ability) to set its own priorities, make this tradeoff?

Case Authors : Matthew C. Weinzierl, Angela Acocella

Topic : Sales & Marketing

Related Areas : Financial analysis, Government, Joint ventures

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Calculating Net Present Value (NPV) at 6% for Blue Origin, NASA, and New Space (A) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10025329)	-10025329	-	-
Year 1	3450628	-6574701	3450628	0.9434	3255309
Year 2	3959967	-2614734	7410595	0.89	3524357
Year 3	3950052	1335318	11360647	0.8396	3316540
Year 4	3250714	4586032	14611361	0.7921	2574870
TOTAL			14611361		12671076

The Net Present Value at 6% discount rate is 2645747

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. Internal Rate of Return
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Nasa Blue 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 Nasa Blue 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 Blue Origin, NASA, and New Space (A)

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 Nasa Blue 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 Nasa Blue 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	(10025329)	-10025329	-	-
Year 1	3450628	-6574701	3450628	0.8696	3000546
Year 2	3959967	-2614734	7410595	0.7561	2994304
Year 3	3950052	1335318	11360647	0.6575	2597223
Year 4	3250714	4586032	14611361	0.5718	1858606
TOTAL					10450680

The Net NPV after 4 years is 425351

(10450680 - 10025329 )

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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	(10025329)	-10025329	-	-
Year 1	3450628	-6574701	3450628	0.8333	2875523
Year 2	3959967	-2614734	7410595	0.6944	2749977
Year 3	3950052	1335318	11360647	0.5787	2285910
Year 4	3250714	4586032	14611361	0.4823	1567667
TOTAL					9479077

The Net NPV after 4 years is -546252

At 20% discount rate the NPV is negative (9479077 - 10025329 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nasa Blue 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 Nasa Blue has a NPV value higher than Zero then finance managers at Nasa Blue 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 Nasa Blue, then the stock price of the Nasa Blue 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 Nasa Blue 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 will be a multi year spillover effect of various taxation regulations.

What can impact the cash flow of the project.

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.

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 Blue Origin, NASA, and New Space (A)

References & Further Readings

Matthew C. Weinzierl, Angela Acocella (2018), "Blue Origin, NASA, and New Space (A) Harvard Business Review Case Study. Published by HBR Publications.