3D Printing at Imaginarium: If You Think It, We Can Build It 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 3D Printing at Imaginarium: If You Think It, We Can Build It case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. 3D Printing at Imaginarium: If You Think It, We Can Build It case study is a Harvard Business School (HBR) case study written by Anshuman Tripathy, Harshvardhan Ketkar, Onkar Kulkarni. The 3D Printing at Imaginarium: If You Think It, We Can Build It (referred as “Imaginarium 3d” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Technology.

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 3D Printing at Imaginarium: If You Think It, We Can Build It Case Study

This case presents an instance of the challenges faced by a firm that has adopted a rapidly evolving technology that is novel, yet non-proprietary. The case focuses on a small, pioneering firm (Imaginarium) in a developing country (India) which has evolved using 3D printing technology extensively. The case views Imaginarium in three phases. Imaginarium 1.0, the first phase relates to the period when jewelry prototyping services was the primary offering of the company; Imaginarium 2.0 refers to the current phase of the firm in which the firm has diversified its offerings and clients from jewelry to industrial prototyping and even small-batch manufacturing in various, often unrelated, verticals. In this phase, Imaginarium has also been involved in advising its clients in the design and development of their parts towards adopting 3D printing. Imaginarium 3.0 represents the next phase that needs to be decided. The case takes the perspective of Ankit Mehta, the promoter of Imaginarium. Mehta has various options: (a) sell-off the firm, (b) maintain status quo and grow along some more verticals with the same level of client engagement, and (c) grow more capabilities towards becoming an integrated service bureau. The case dwells on (1) What are the opportunities and benefits that 3D printing technology has brought forward? (2) How do firms that have evolved around 3D printing remain sustainable? (3) How do firms that have probably not adopted 3D printing but are now part of the 3D printing ecosystem, remain sustainable?

Case Authors : Anshuman Tripathy, Harshvardhan Ketkar, Onkar Kulkarni

Topic : Technology & Operations

Related Areas : Technology

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Calculating Net Present Value (NPV) at 6% for 3D Printing at Imaginarium: If You Think It, We Can Build It Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009052)	-10009052	-	-
Year 1	3471952	-6537100	3471952	0.9434	3275426
Year 2	3969111	-2567989	7441063	0.89	3532495
Year 3	3959958	1391969	11401021	0.8396	3324857
Year 4	3234081	4626050	14635102	0.7921	2561695
TOTAL			14635102		12694473

The Net Present Value at 6% discount rate is 2685421

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Imaginarium 3d 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 Imaginarium 3d have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of 3D Printing at Imaginarium: If You Think It, We Can Build It

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 Imaginarium 3d 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 Imaginarium 3d 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	(10009052)	-10009052	-	-
Year 1	3471952	-6537100	3471952	0.8696	3019089
Year 2	3969111	-2567989	7441063	0.7561	3001218
Year 3	3959958	1391969	11401021	0.6575	2603737
Year 4	3234081	4626050	14635102	0.5718	1849096
TOTAL					10473140

The Net NPV after 4 years is 464088

(10473140 - 10009052 )

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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	(10009052)	-10009052	-	-
Year 1	3471952	-6537100	3471952	0.8333	2893293
Year 2	3969111	-2567989	7441063	0.6944	2756327
Year 3	3959958	1391969	11401021	0.5787	2291642
Year 4	3234081	4626050	14635102	0.4823	1559646
TOTAL					9500908

The Net NPV after 4 years is -508144

At 20% discount rate the NPV is negative (9500908 - 10009052 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Imaginarium 3d 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 Imaginarium 3d has a NPV value higher than Zero then finance managers at Imaginarium 3d 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 Imaginarium 3d, then the stock price of the Imaginarium 3d 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 Imaginarium 3d 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 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.

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 3D Printing at Imaginarium: If You Think It, We Can Build It

References & Further Readings

Anshuman Tripathy, Harshvardhan Ketkar, Onkar Kulkarni (2018), "3D Printing at Imaginarium: If You Think It, We Can Build It Harvard Business Review Case Study. Published by HBR Publications.