×




MK Taxi: Private Chauffeur Service 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 MK Taxi: Private Chauffeur Service case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. MK Taxi: Private Chauffeur Service case study is a Harvard Business School (HBR) case study written by Andrew McAfee. The MK Taxi: Private Chauffeur Service (referred as “Mk Pcs” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Developing employees, Entrepreneurship, Internet, IT.

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 MK Taxi: Private Chauffeur Service Case Study


This case is accompanied by a Video Short that can be shown in class or included in a digital coursepack. Instructors should consider the timing of making the video available to students, as it may reveal key case details.MK Taxi Tokyo has developed a system to allow customers to use their mobile phones to find and contact the cab closest to them, bypassing the dispatch center. The system, called the Private Chauffeur Service (PCS), makes use of NTT's i-mode service, which essentially turns mobile phones into small Internet terminals. MK worked with NTT to develop an application that physically locates each PCS caller, determines the closest cab, and automatically connects the customer with the cab's driver for a voice call. At the time of the case, Maasaki Aoki, the head of MK Tokyo, wonders how best to expand and enhance the PCS service.


Case Authors : Andrew McAfee

Topic : Technology & Operations

Related Areas : Developing employees, Entrepreneurship, Internet, IT




Calculating Net Present Value (NPV) at 6% for MK Taxi: Private Chauffeur Service Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10019404) -10019404 - -
Year 1 3451407 -6567997 3451407 0.9434 3256044
Year 2 3963142 -2604855 7414549 0.89 3527182
Year 3 3974405 1369550 11388954 0.8396 3336987
Year 4 3248136 4617686 14637090 0.7921 2572828
TOTAL 14637090 12693042




The Net Present Value at 6% discount rate is 2673638

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. Net Present Value
3. Profitability Index
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 Mk Pcs 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. Mk Pcs 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 MK Taxi: Private Chauffeur Service

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 Mk Pcs 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 Mk Pcs 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 (10019404) -10019404 - -
Year 1 3451407 -6567997 3451407 0.8696 3001223
Year 2 3963142 -2604855 7414549 0.7561 2996705
Year 3 3974405 1369550 11388954 0.6575 2613236
Year 4 3248136 4617686 14637090 0.5718 1857132
TOTAL 10468296


The Net NPV after 4 years is 448892

(10468296 - 10019404 )








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 (10019404) -10019404 - -
Year 1 3451407 -6567997 3451407 0.8333 2876173
Year 2 3963142 -2604855 7414549 0.6944 2752182
Year 3 3974405 1369550 11388954 0.5787 2300003
Year 4 3248136 4617686 14637090 0.4823 1566424
TOTAL 9494781


The Net NPV after 4 years is -524623

At 20% discount rate the NPV is negative (9494781 - 10019404 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mk Pcs 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 Mk Pcs has a NPV value higher than Zero then finance managers at Mk Pcs 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 Mk Pcs, then the stock price of the Mk Pcs 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 Mk Pcs 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 key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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.

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 MK Taxi: Private Chauffeur Service

References & Further Readings

Andrew McAfee (2018), "MK Taxi: Private Chauffeur Service Harvard Business Review Case Study. Published by HBR Publications.


KappAhl SWOT Analysis / TOWS Matrix

Services , Retail (Apparel)


Dassault Aviation SWOT Analysis / TOWS Matrix

Capital Goods , Aerospace & Defense


Ebest Special 2 Co SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Sureserve SWOT Analysis / TOWS Matrix

Services , Business Services


Mercurius Capital Investment SWOT Analysis / TOWS Matrix

Consumer/Non-Cyclical , Personal & Household Prods.


Modern Water SWOT Analysis / TOWS Matrix

Services , Waste Management Services