OWNI: Disrupting the French Media Landscape 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 OWNI: Disrupting the French Media Landscape case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. OWNI: Disrupting the French Media Landscape case study is a Harvard Business School (HBR) case study written by Jean-Philippe Vergne, Ken Mark. The OWNI: Disrupting the French Media Landscape (referred as “Owni French” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Strategy.

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 OWNI: Disrupting the French Media Landscape Case Study

OWNI was founded in April 2009 as a copyright-free online news and image distribution firm. As part of a web agency that developed web content and graphics for French companies, it insisted that all content produced could be made freely available to others under the Creative Commons licence. OWNI delivered hard-hitting news, sourced in the beginning mostly from bloggers and later supplemented by a team of investigative journalists. Set up to challenge the dominance of traditional French media, OWNI sought to carve out a niche for itself as a provider of richly illustrated, insightful news articles that were available to the public at no cost. Yet, despite its aspirations, the recognition it had received in the form of industry awards and the commitment of its employees, the firm filed for bankruptcy by the end of 2012. A former journalist at OWNI considers its impact on French media, what it represented, what changes - if any - it sparked and what it could have accomplished had it achieved what it set out to do. What were the challenges of growing and maintaining a unique business model in the face of competition and dwindling resources that OWNI's management failed to meet?

Case Authors : Jean-Philippe Vergne, Ken Mark

Topic : Strategy & Execution

Related Areas : Strategy

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Calculating Net Present Value (NPV) at 6% for OWNI: Disrupting the French Media Landscape Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10025843)	-10025843	-	-
Year 1	3452057	-6573786	3452057	0.9434	3256658
Year 2	3957562	-2616224	7409619	0.89	3522216
Year 3	3943155	1326931	11352774	0.8396	3310749
Year 4	3232285	4559216	14585059	0.7921	2560272
TOTAL			14585059		12649895

The Net Present Value at 6% discount rate is 2624052

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 Owni French 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. Owni French 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 OWNI: Disrupting the French Media Landscape

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 Strategy & Execution 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 Owni French 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 Owni French 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	(10025843)	-10025843	-	-
Year 1	3452057	-6573786	3452057	0.8696	3001789
Year 2	3957562	-2616224	7409619	0.7561	2992485
Year 3	3943155	1326931	11352774	0.6575	2592688
Year 4	3232285	4559216	14585059	0.5718	1848069
TOTAL					10435032

The Net NPV after 4 years is 409189

(10435032 - 10025843 )

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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	(10025843)	-10025843	-	-
Year 1	3452057	-6573786	3452057	0.8333	2876714
Year 2	3957562	-2616224	7409619	0.6944	2748307
Year 3	3943155	1326931	11352774	0.5787	2281918
Year 4	3232285	4559216	14585059	0.4823	1558779
TOTAL					9465719

The Net NPV after 4 years is -560124

At 20% discount rate the NPV is negative (9465719 - 10025843 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Owni French 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 Owni French has a NPV value higher than Zero then finance managers at Owni French 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 Owni French, then the stock price of the Owni French 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 Owni French 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 will be a multi year spillover effect of various taxation regulations.

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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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.

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Negotiation Strategy of OWNI: Disrupting the French Media Landscape

References & Further Readings

Jean-Philippe Vergne, Ken Mark (2018), "OWNI: Disrupting the French Media Landscape Harvard Business Review Case Study. Published by HBR Publications.