TiVo 2007: DVRs and Beyond, Spanish Version 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 TiVo 2007: DVRs and Beyond, Spanish Version case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. TiVo 2007: DVRs and Beyond, Spanish Version case study is a Harvard Business School (HBR) case study written by David B. Yoffie, Michael Slind. The TiVo 2007: DVRs and Beyond, Spanish Version (referred as “Dvr Tivo” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, IT, Marketing, Strategy execution.

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 TiVo 2007: DVRs and Beyond, Spanish Version Case Study

Tom Rogers, CEO of TiVo, had placed multiple strategic bets on his company. In September 2007, that strategy was due for a major test. TiVo was a maker of digital video recorder (DVR) products and a distributor of DVR technology. Rogers believed that macro-trends in the home entertainment industry--the convergence of standard television with the delivery of video content via broadband Internet, and the related crisis faced by companies whose business models relied on TV advertising--played to TiVo's unique strengths. Leadership in DVR technology and a TV-centric user interface arguably positioned TiVo to become something more than a consumer electronics company. That was Roger's big bet. Implementing it required making six other bets: continuing to sell stand-alone DVRs in the retail market, despite rapidly eroding market share; distributing TiVo service in partnership with cable and satellite TV providers (which also functioned as TiVo's chief competitors in the DVR market); developing a platform for DVR-based advertising; entering the audience research business; leveraging TiVo's intellectual property both through litigation and in the marketplace; and expanding into non-U.S. markets. In late 2007, a pivotal new product, a major distribution deal with cable operator Comcast, and a key intellectual property lawsuit were all reaching points of critical impact.

Case Authors : David B. Yoffie, Michael Slind

Topic : Strategy & Execution

Related Areas : IT, Marketing, Strategy execution

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Calculating Net Present Value (NPV) at 6% for TiVo 2007: DVRs and Beyond, Spanish Version Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10022865)	-10022865	-	-
Year 1	3455468	-6567397	3455468	0.9434	3259875
Year 2	3971434	-2595963	7426902	0.89	3534562
Year 3	3953577	1357614	11380479	0.8396	3319499
Year 4	3227768	4585382	14608247	0.7921	2556695
TOTAL			14608247		12670632

The Net Present Value at 6% discount rate is 2647767

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. Profitability Index
3. Payback Period
4. Net Present Value

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 Dvr Tivo 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. Dvr Tivo 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 TiVo 2007: DVRs and Beyond, Spanish Version

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 Dvr Tivo 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 Dvr Tivo 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	(10022865)	-10022865	-	-
Year 1	3455468	-6567397	3455468	0.8696	3004755
Year 2	3971434	-2595963	7426902	0.7561	3002975
Year 3	3953577	1357614	11380479	0.6575	2599541
Year 4	3227768	4585382	14608247	0.5718	1845487
TOTAL					10452757

The Net NPV after 4 years is 429892

(10452757 - 10022865 )

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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	(10022865)	-10022865	-	-
Year 1	3455468	-6567397	3455468	0.8333	2879557
Year 2	3971434	-2595963	7426902	0.6944	2757940
Year 3	3953577	1357614	11380479	0.5787	2287950
Year 4	3227768	4585382	14608247	0.4823	1556601
TOTAL					9482048

The Net NPV after 4 years is -540817

At 20% discount rate the NPV is negative (9482048 - 10022865 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Dvr Tivo 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 Dvr Tivo has a NPV value higher than Zero then finance managers at Dvr Tivo 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 Dvr Tivo, then the stock price of the Dvr Tivo 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 Dvr Tivo 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.

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.

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 TiVo 2007: DVRs and Beyond, Spanish Version

References & Further Readings

David B. Yoffie, Michael Slind (2018), "TiVo 2007: DVRs and Beyond, Spanish Version Harvard Business Review Case Study. Published by HBR Publications.