PLBsearch: Growing with LinkedIn 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 PLBsearch: Growing with LinkedIn case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. PLBsearch: Growing with LinkedIn case study is a Harvard Business School (HBR) case study written by Meghan Murray, Marian Chapman Moore. The PLBsearch: Growing with LinkedIn (referred as “Linkedin Recruiting” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Hiring, Internet, Talent management.

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

---

Case Description of PLBsearch: Growing with LinkedIn Case Study

This case is used in Darden's "Digital Marketing" course elective. It explores the experience of a niche search firm whose founder attributed her ability to open her recruiting firm to LinkedIn and the new model of recruiting it created. LinkedIn Corporation had been one of the most successful companies in the digital media space, with more than 4,000 employees and a market capitalization of over $25.5 billion in August 2013. But few people knew how LinkedIn had grown and how it had become profitable. LinkedIn had multiple unique aspects to explore: its focus on professional--not simply personal--social interaction, the company's B2B components, and also its marketing positioning from user experience to targeting and growth strategy.

Case Authors : Meghan Murray, Marian Chapman Moore

Topic : Sales & Marketing

Related Areas : Hiring, Internet, Talent management

---

Calculating Net Present Value (NPV) at 6% for PLBsearch: Growing with LinkedIn Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10013357)	-10013357	-	-
Year 1	3447060	-6566297	3447060	0.9434	3251943
Year 2	3956543	-2609754	7403603	0.89	3521309
Year 3	3960183	1350429	11363786	0.8396	3325046
Year 4	3241641	4592070	14605427	0.7921	2567683
TOTAL			14605427		12665982

The Net Present Value at 6% discount rate is 2652625

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.

---

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. Payback Period
3. Internal Rate of Return
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 Linkedin Recruiting 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. Linkedin Recruiting shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

---

Formula and Steps to Calculate Net Present Value (NPV) of PLBsearch: Growing with LinkedIn

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 Linkedin Recruiting 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 Linkedin Recruiting 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	(10013357)	-10013357	-	-
Year 1	3447060	-6566297	3447060	0.8696	2997443
Year 2	3956543	-2609754	7403603	0.7561	2991715
Year 3	3960183	1350429	11363786	0.6575	2603885
Year 4	3241641	4592070	14605427	0.5718	1853419
TOTAL					10446462

The Net NPV after 4 years is 433105

(10446462 - 10013357 )

---

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	(10013357)	-10013357	-	-
Year 1	3447060	-6566297	3447060	0.8333	2872550
Year 2	3956543	-2609754	7403603	0.6944	2747599
Year 3	3960183	1350429	11363786	0.5787	2291773
Year 4	3241641	4592070	14605427	0.4823	1563291
TOTAL					9475213

The Net NPV after 4 years is -538144

At 20% discount rate the NPV is negative (9475213 - 10013357 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Linkedin Recruiting 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 Linkedin Recruiting has a NPV value higher than Zero then finance managers at Linkedin Recruiting 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 Linkedin Recruiting, then the stock price of the Linkedin Recruiting 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 Linkedin Recruiting 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 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.

What will be a multi year spillover effect of various taxation regulations.

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.

---

Negotiation Strategy of PLBsearch: Growing with LinkedIn

References & Further Readings

Meghan Murray, Marian Chapman Moore (2018), "PLBsearch: Growing with LinkedIn Harvard Business Review Case Study. Published by HBR Publications.