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American Well: The DTC Decision 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 American Well: The DTC Decision case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. American Well: The DTC Decision case study is a Harvard Business School (HBR) case study written by Elie Ofek, Natalie Kindred. The American Well: The DTC Decision (referred as “Dtc Telehealth” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Entrepreneurship, Health, Marketing, Technology.

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 American Well: The DTC Decision Case Study


In late 2013, telehealth company American Well, which developed a digital platform that allowed patients to conduct online medical consultations with physicians, is considering pursuing a direct-to-consumer (DTC) strategy. Founded in 2006, American Well had, to date, primarily sold its solution to health plans, which then provided online care services to their members using their own brand name. But while American Well attracted some of the largest U.S. health insurers as clients, a surprisingly small number of individual members had actually used the online care service. American Well management believed low consumer awareness-the result of insufficient marketing by health plans, among other factors-was hampering uptake of what should be a highly valuable offering for all stakeholders involved. They wondered if a DTC approach, in which American Well would become a consumer brand and market a telehealth service directly to the public, for example through a mobile app, could drive utilization and catapult the business to the next level. If a DTC offering were given the green light, the company had to come up with a coherent marketing plan to launch it and figure out how to manage potential conflicts with existing clients, who might view the move as competing with their own telehealth efforts. Moreover, the move had to be considered in light of other initiatives the company had recently embarked on, such as marketing its platform to pharmacy chains, targeting large employers, and selling kiosks that provided a physical space to conduct online consultations. The case forces students to grapple with the challenges and barriers involved in disrupting an established industry, examine alternative go-to-market strategies and the timing of implementing them, and consider different business models to manage supply and generate revenues. The case also offers a rich analysis of digital marketing issues.


Case Authors : Elie Ofek, Natalie Kindred

Topic : Sales & Marketing

Related Areas : Entrepreneurship, Health, Marketing, Technology




Calculating Net Present Value (NPV) at 6% for American Well: The DTC Decision Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10018769) -10018769 - -
Year 1 3463693 -6555076 3463693 0.9434 3267635
Year 2 3958998 -2596078 7422691 0.89 3523494
Year 3 3950092 1354014 11372783 0.8396 3316573
Year 4 3223004 4577018 14595787 0.7921 2552921
TOTAL 14595787 12660623




The Net Present Value at 6% discount rate is 2641854

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. Profitability Index
3. Payback Period
4. Internal Rate of Return

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. Dtc Telehealth 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 Dtc Telehealth have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of American Well: The DTC Decision

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 Dtc Telehealth 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 Dtc Telehealth 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 (10018769) -10018769 - -
Year 1 3463693 -6555076 3463693 0.8696 3011907
Year 2 3958998 -2596078 7422691 0.7561 2993571
Year 3 3950092 1354014 11372783 0.6575 2597250
Year 4 3223004 4577018 14595787 0.5718 1842763
TOTAL 10445491


The Net NPV after 4 years is 426722

(10445491 - 10018769 )








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 (10018769) -10018769 - -
Year 1 3463693 -6555076 3463693 0.8333 2886411
Year 2 3958998 -2596078 7422691 0.6944 2749304
Year 3 3950092 1354014 11372783 0.5787 2285933
Year 4 3223004 4577018 14595787 0.4823 1554304
TOTAL 9475951


The Net NPV after 4 years is -542818

At 20% discount rate the NPV is negative (9475951 - 10018769 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Dtc Telehealth 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 Dtc Telehealth has a NPV value higher than Zero then finance managers at Dtc Telehealth 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 Dtc Telehealth, then the stock price of the Dtc Telehealth 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 Dtc Telehealth 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 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.

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.






Negotiation Strategy of American Well: The DTC Decision

References & Further Readings

Elie Ofek, Natalie Kindred (2018), "American Well: The DTC Decision Harvard Business Review Case Study. Published by HBR Publications.


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