Peter Guber: The "Me" vs. "We" Brand 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 Peter Guber: The "Me" vs. "We" Brand case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Peter Guber: The "Me" vs. "We" Brand case study is a Harvard Business School (HBR) case study written by Stephen A. Greyser, William Ellet, Nelson Gayton. The Peter Guber: The "Me" vs. "We" Brand (referred as “Mandalay Guber” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Competitive strategy, Decision making, Entrepreneurship, Leadership, Work-life balance.

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 Peter Guber: The "Me" vs. "We" Brand Case Study

Well-known film producer Peter Guber must decide whether to commit to a time-consuming personal project. He is about to sign a contract for a business book in which he will share what he has learned in his long career. At the same time, he is keenly aware of problems and uncertainties affecting Mandalay Entertainment, a privately-owned company in which he is principal. Mandalay produces movies and television content, owns minor league baseball teams, and is pushing into digital content. Mandalay is trying to reinvigorate its core movie and television businesses, maintain growth in the sports business, and be prepared for the opportunity to buy a major league professional sports franchise. Does Guber eliminate all personal projects and stay tightly focused on guiding his company? On the other hand, there may never be a good time to write a book. He also has to consider the potential impact of a book project on his personal brand and the Mandalay company brand.

Case Authors : Stephen A. Greyser, William Ellet, Nelson Gayton

Topic : Sales & Marketing

Related Areas : Competitive strategy, Decision making, Entrepreneurship, Leadership, Work-life balance

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Calculating Net Present Value (NPV) at 6% for Peter Guber: The "Me" vs. "We" Brand Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009120)	-10009120	-	-
Year 1	3471133	-6537987	3471133	0.9434	3274654
Year 2	3974898	-2563089	7446031	0.89	3537645
Year 3	3964102	1401013	11410133	0.8396	3328336
Year 4	3236665	4637678	14646798	0.7921	2563742
TOTAL			14646798		12704377

The Net Present Value at 6% discount rate is 2695257

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 Mandalay Guber 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. Mandalay Guber 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 Peter Guber: The "Me" vs. "We" Brand

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 Mandalay Guber 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 Mandalay Guber 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	(10009120)	-10009120	-	-
Year 1	3471133	-6537987	3471133	0.8696	3018377
Year 2	3974898	-2563089	7446031	0.7561	3005594
Year 3	3964102	1401013	11410133	0.6575	2606461
Year 4	3236665	4637678	14646798	0.5718	1850574
TOTAL					10481006

The Net NPV after 4 years is 471886

(10481006 - 10009120 )

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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	(10009120)	-10009120	-	-
Year 1	3471133	-6537987	3471133	0.8333	2892611
Year 2	3974898	-2563089	7446031	0.6944	2760346
Year 3	3964102	1401013	11410133	0.5787	2294041
Year 4	3236665	4637678	14646798	0.4823	1560892
TOTAL					9507889

The Net NPV after 4 years is -501231

At 20% discount rate the NPV is negative (9507889 - 10009120 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mandalay Guber 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 Mandalay Guber has a NPV value higher than Zero then finance managers at Mandalay Guber 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 Mandalay Guber, then the stock price of the Mandalay Guber 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 Mandalay Guber 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 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.

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.

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 Peter Guber: The "Me" vs. "We" Brand

References & Further Readings

Stephen A. Greyser, William Ellet, Nelson Gayton (2018), "Peter Guber: The "Me" vs. "We" Brand Harvard Business Review Case Study. Published by HBR Publications.