DoubleClick, Inc.: Gathering Customer Intelligence 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 DoubleClick, Inc.: Gathering Customer Intelligence case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. DoubleClick, Inc.: Gathering Customer Intelligence case study is a Harvard Business School (HBR) case study written by Ken Mark, Scott Schneberger. The DoubleClick, Inc.: Gathering Customer Intelligence (referred as “Doubleclick Surfers” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, IT, Marketing, Risk management.

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 DoubleClick, Inc.: Gathering Customer Intelligence Case Study

DoubleClick, Inc., with global headquarters in New York City and over 30 offices around the world, was a leading provider of comprehensive Internet advertising solutions for marketers and web publishers. It combined technology, media, and data expertise to centralize planning, execution, control, tracking, and reporting for online media companies. DoubleClick was able to track Internet users' surfing habits (but not the surfers' identities), allowing it to personalize ads for specific market groups. When DoubleClick announced it was merging with Abacus Direct, a direct marketing company with a database of consumer names, addresses, and retail purchasing habits of 90% of American households, it raised many privacy-related questions and concerns. Several Internet privacy activists had filed a formal complaint with the Federal Trade Commission after being informed by media sources that DoubleClick had the ability to divulge a person's identity by merging the databases of the two companies and matching the information in "cookies" with a surfer's profile. The president was confident that its internal practices were sound, but he wondered whether they would placate advertising clients afraid of consumer backlash, the concerns of Internet surfers, and the company's investors.

Case Authors : Ken Mark, Scott Schneberger

Topic : Technology & Operations

Related Areas : IT, Marketing, Risk management

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Calculating Net Present Value (NPV) at 6% for DoubleClick, Inc.: Gathering Customer Intelligence Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014716)	-10014716	-	-
Year 1	3473014	-6541702	3473014	0.9434	3276428
Year 2	3979227	-2562475	7452241	0.89	3541498
Year 3	3972200	1409725	11424441	0.8396	3335136
Year 4	3240653	4650378	14665094	0.7921	2566901
TOTAL			14665094		12719963

The Net Present Value at 6% discount rate is 2705247

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

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 Doubleclick Surfers 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. Doubleclick Surfers 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 DoubleClick, Inc.: Gathering Customer Intelligence

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 Technology & Operations 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 Doubleclick Surfers 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 Doubleclick Surfers 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	(10014716)	-10014716	-	-
Year 1	3473014	-6541702	3473014	0.8696	3020012
Year 2	3979227	-2562475	7452241	0.7561	3008867
Year 3	3972200	1409725	11424441	0.6575	2611786
Year 4	3240653	4650378	14665094	0.5718	1852854
TOTAL					10493519

The Net NPV after 4 years is 478803

(10493519 - 10014716 )

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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	(10014716)	-10014716	-	-
Year 1	3473014	-6541702	3473014	0.8333	2894178
Year 2	3979227	-2562475	7452241	0.6944	2763352
Year 3	3972200	1409725	11424441	0.5787	2298727
Year 4	3240653	4650378	14665094	0.4823	1562815
TOTAL					9519072

The Net NPV after 4 years is -495644

At 20% discount rate the NPV is negative (9519072 - 10014716 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Doubleclick Surfers 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 Doubleclick Surfers has a NPV value higher than Zero then finance managers at Doubleclick Surfers 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 Doubleclick Surfers, then the stock price of the Doubleclick Surfers 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 Doubleclick Surfers 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 are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What can impact the cash flow of 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 DoubleClick, Inc.: Gathering Customer Intelligence

References & Further Readings

Ken Mark, Scott Schneberger (2018), "DoubleClick, Inc.: Gathering Customer Intelligence Harvard Business Review Case Study. Published by HBR Publications.