Stories That Deliver Business Insights 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 Stories That Deliver Business Insights case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Stories That Deliver Business Insights case study is a Harvard Business School (HBR) case study written by Julien Cayla, Robin Beers, Eric Arnould. The Stories That Deliver Business Insights (referred as “Ethnography Stories” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, .

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 Stories That Deliver Business Insights Case Study

This is an MIT Sloan Management Review article. Ethnography has often been portrayed as a "fly on the wall"technique, with anthropologists lurking in people's homes to observe consumers'unadulterated lives. The authors argue that this description does not do justice to the way ethnography actually works in the corporate world or to ethnography's increasingly important role in formulating business strategy. The authors'research across a variety of companies suggests that ethnography -artful in situ investigation into what customers do and feel and how they talk about what they do and feel -is a powerful tool to use to gain insights into your market. To arrive at a more in-depth understanding of how corporations use ethnography to their advantage, the authors conducted interviews with executives in various industries worldwide, including Ford and Wells Fargo. Where data analytics and surveys provide flattened snapshots, ethnography contributes an empathic understanding of how consumers live, work and play through gritty and detailed descriptions. Whether conveyed in video format, presentations or reports, these stories describe how people confront and surmount the hurdles they encounter in meeting their responsibilities and fulfilling their hopes in our globalized consumer culture. By delving into the richness of people's life stories, ethnographic research can pivot companies away from less meaningful segmentation parameters, such as demographics or purchase history, and toward those that drive behavior, such as purpose and intent. Quantitative techniques such as factor analysis can subsequently be applied to locate and size market segments. Consistent with the idea that ethnography helps organizations deal more effectively with market complexities, the executives the authors interviewed often talked about ethnography as having helped them sort out puzzling data. While these discussions call into dispute the perception that ethnography is merely an exploratory technique, they also underline the point that ethnographic stories often provide insight into consumer behavior that is hard to come by in other ways.

Case Authors : Julien Cayla, Robin Beers, Eric Arnould

Topic : Sales & Marketing

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Stories That Deliver Business Insights Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10015627)	-10015627	-	-
Year 1	3443543	-6572084	3443543	0.9434	3248625
Year 2	3957315	-2614769	7400858	0.89	3521996
Year 3	3936089	1321320	11336947	0.8396	3304816
Year 4	3222380	4543700	14559327	0.7921	2552427
TOTAL			14559327		12627865

The Net Present Value at 6% discount rate is 2612238

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. Internal Rate of Return
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Ethnography Stories 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 Ethnography Stories 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 Stories That Deliver Business Insights

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 Ethnography Stories 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 Ethnography Stories 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	(10015627)	-10015627	-	-
Year 1	3443543	-6572084	3443543	0.8696	2994385
Year 2	3957315	-2614769	7400858	0.7561	2992299
Year 3	3936089	1321320	11336947	0.6575	2588042
Year 4	3222380	4543700	14559327	0.5718	1842406
TOTAL					10417133

The Net NPV after 4 years is 401506

(10417133 - 10015627 )

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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	(10015627)	-10015627	-	-
Year 1	3443543	-6572084	3443543	0.8333	2869619
Year 2	3957315	-2614769	7400858	0.6944	2748135
Year 3	3936089	1321320	11336947	0.5787	2277829
Year 4	3222380	4543700	14559327	0.4823	1554003
TOTAL					9449587

The Net NPV after 4 years is -566040

At 20% discount rate the NPV is negative (9449587 - 10015627 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ethnography Stories 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 Ethnography Stories has a NPV value higher than Zero then finance managers at Ethnography Stories 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 Ethnography Stories, then the stock price of the Ethnography Stories 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 Ethnography Stories 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.

Understanding of risks involved in 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.

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 Stories That Deliver Business Insights

References & Further Readings

Julien Cayla, Robin Beers, Eric Arnould (2018), "Stories That Deliver Business Insights Harvard Business Review Case Study. Published by HBR Publications.