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Nintendo Wii U: Lessons Learned for New Strategic Directions 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 Nintendo Wii U: Lessons Learned for New Strategic Directions case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Nintendo Wii U: Lessons Learned for New Strategic Directions case study is a Harvard Business School (HBR) case study written by Wiboon Kittilaksanawong, Gary Gillet. The Nintendo Wii U: Lessons Learned for New Strategic Directions (referred as “Nintendo Wii” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, .

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 Nintendo Wii U: Lessons Learned for New Strategic Directions Case Study


Founded in 1889 in Kyoto, Japan, Nintendo has always operated in the entertainment business, beginning with playing cards and, in the 1970s, entering the electronics and video game industry with a small handheld console. By investing in innovation to ensure continuing delivery of new recreational experiences, Nintendo was dominant until the mid-1990s when the two multinational giants, Sony and Microsoft, entered the market with large investment capital and promotional campaigns. Nintendo competed with these new challengers, but its Wii U and 3DS systems, launched in November 2012, met with little success. In 2014, the company faces many questions as it looks to move forward. Has it lost its innovative edge? Were its strengths in human resources and research and development not being leveraged to their full potential? Can the new strategic directions - to revitalize existing products, take advantage of smart devices, actively utilize existing character IPs and expand into other new markets and other new business areas - successfully revive the traditional dominant position of Nintendo in the game industry? Should it pursue strategic alliances or mergers and acquisitions to acquire required resources and competencies from outside to invest in product and market diversification? Wiboon Kittilaksanawong is affiliated with Nagoya University of Commerce & Business.


Case Authors : Wiboon Kittilaksanawong, Gary Gillet

Topic : Strategy & Execution

Related Areas :




Calculating Net Present Value (NPV) at 6% for Nintendo Wii U: Lessons Learned for New Strategic Directions Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10019087) -10019087 - -
Year 1 3455334 -6563753 3455334 0.9434 3259749
Year 2 3973796 -2589957 7429130 0.89 3536664
Year 3 3964710 1374753 11393840 0.8396 3328847
Year 4 3238451 4613204 14632291 0.7921 2565157
TOTAL 14632291 12690417




The Net Present Value at 6% discount rate is 2671330

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. Profitability Index
2. Net Present Value
3. Internal Rate of Return
4. Payback Period

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 Nintendo Wii 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. Nintendo Wii 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 Nintendo Wii U: Lessons Learned for New Strategic Directions

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 Nintendo Wii 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 Nintendo Wii 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 (10019087) -10019087 - -
Year 1 3455334 -6563753 3455334 0.8696 3004638
Year 2 3973796 -2589957 7429130 0.7561 3004761
Year 3 3964710 1374753 11393840 0.6575 2606861
Year 4 3238451 4613204 14632291 0.5718 1851595
TOTAL 10467855


The Net NPV after 4 years is 448768

(10467855 - 10019087 )








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 (10019087) -10019087 - -
Year 1 3455334 -6563753 3455334 0.8333 2879445
Year 2 3973796 -2589957 7429130 0.6944 2759581
Year 3 3964710 1374753 11393840 0.5787 2294392
Year 4 3238451 4613204 14632291 0.4823 1561753
TOTAL 9495171


The Net NPV after 4 years is -523916

At 20% discount rate the NPV is negative (9495171 - 10019087 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Nintendo Wii 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 Nintendo Wii has a NPV value higher than Zero then finance managers at Nintendo Wii 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 Nintendo Wii, then the stock price of the Nintendo Wii 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 Nintendo Wii 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 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 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.

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 Nintendo Wii U: Lessons Learned for New Strategic Directions

References & Further Readings

Wiboon Kittilaksanawong, Gary Gillet (2018), "Nintendo Wii U: Lessons Learned for New Strategic Directions Harvard Business Review Case Study. Published by HBR Publications.


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