×




Totally Tidy by Tilly 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 Totally Tidy by Tilly case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Totally Tidy by Tilly case study is a Harvard Business School (HBR) case study written by Elizabeth M.A. Grasby, Brian Langen. The Totally Tidy by Tilly (referred as “Tidy Tilly” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Budgeting, Entrepreneurship, Marketing.

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 Totally Tidy by Tilly Case Study


Spring cleaning season 2015 was about to begin in a small community north of Toronto, Ontario, Canada, and a prospective business owner was deciding whether to launch a new business. Totally Tidy by Tilly would provide cleaning services, professional organizing services, or both. Before moving forward, this new entrepreneur first needed to understand the environment for her new venture. Based on that understanding, she needed to decide what services to offer and at what prices, and how best to promote her new business. To determine financial feasibility, she projected the company's financial performance for the first three years of operations. Should the entrepreneur stay close to home, within her community, or would a viable and profitable business plan involve a larger area? Would the business provide a reasonable income, or would this significant change in her lifestyle only prevent her from enjoying the flexibility of being a stay-at-home parent?


Case Authors : Elizabeth M.A. Grasby, Brian Langen

Topic : Finance & Accounting

Related Areas : Budgeting, Entrepreneurship, Marketing




Calculating Net Present Value (NPV) at 6% for Totally Tidy by Tilly Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10023965) -10023965 - -
Year 1 3445815 -6578150 3445815 0.9434 3250769
Year 2 3961619 -2616531 7407434 0.89 3525827
Year 3 3964705 1348174 11372139 0.8396 3328843
Year 4 3243135 4591309 14615274 0.7921 2568867
TOTAL 14615274 12674305




The Net Present Value at 6% discount rate is 2650340

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Tidy Tilly 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 Tidy Tilly 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 Totally Tidy by Tilly

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 Finance & Accounting 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 Tidy Tilly 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 Tidy Tilly 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 (10023965) -10023965 - -
Year 1 3445815 -6578150 3445815 0.8696 2996361
Year 2 3961619 -2616531 7407434 0.7561 2995553
Year 3 3964705 1348174 11372139 0.6575 2606858
Year 4 3243135 4591309 14615274 0.5718 1854273
TOTAL 10453045


The Net NPV after 4 years is 429080

(10453045 - 10023965 )








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 (10023965) -10023965 - -
Year 1 3445815 -6578150 3445815 0.8333 2871513
Year 2 3961619 -2616531 7407434 0.6944 2751124
Year 3 3964705 1348174 11372139 0.5787 2294389
Year 4 3243135 4591309 14615274 0.4823 1564012
TOTAL 9481038


The Net NPV after 4 years is -542927

At 20% discount rate the NPV is negative (9481038 - 10023965 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Tidy Tilly 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 Tidy Tilly has a NPV value higher than Zero then finance managers at Tidy Tilly 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 Tidy Tilly, then the stock price of the Tidy Tilly 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 Tidy Tilly 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 Totally Tidy by Tilly

References & Further Readings

Elizabeth M.A. Grasby, Brian Langen (2018), "Totally Tidy by Tilly Harvard Business Review Case Study. Published by HBR Publications.


ZheJiang JiHua SWOT Analysis / TOWS Matrix

Basic Materials , Chemical Manufacturing


Cohort SWOT Analysis / TOWS Matrix

Technology , Communications Equipment


F&M SWOT Analysis / TOWS Matrix

Services , Business Services


Sportsquest Inc SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


InnerWorkings SWOT Analysis / TOWS Matrix

Services , Printing Services


Reworld Media SWOT Analysis / TOWS Matrix

Technology , Computer Services


Turbo Mech Bhd SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods


Yamabiko Corp SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods


Bahema SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services