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Creativity in Design: Experimenting and Innovating at teamLab Japan 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 Creativity in Design: Experimenting and Innovating at teamLab Japan case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Creativity in Design: Experimenting and Innovating at teamLab Japan case study is a Harvard Business School (HBR) case study written by Ali Farhoomand, Havovi Joshi. The Creativity in Design: Experimenting and Innovating at teamLab Japan (referred as “Teamlab Inoko” from here on) case study provides evaluation & decision scenario in field of Technology & Operations. It also touches upon business topics such as - Value proposition, Creativity, Design, Entrepreneurship, Organizational culture.

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 Creativity in Design: Experimenting and Innovating at teamLab Japan Case Study


In 2001, Toshiyuki Inoko founded the Japanese digital artist collaborative, teamLab, with an aim to achieve a balance between art, science, technology and creativity by creating original digital designs. This involves the use of extremely sophisticated digital media work which can be presented via computers, high definition monitors, and/or projections, depending on the space available for installation. From a small group of five friends that set up the company in 2001, teamLab has since grown to over 400 employees working on more than one hundred projects at any point in time. teamLab's business model appeared to have successfully harnessed the creativity and expertise of its people to deliver innovative and imaginative products that were becoming increasingly popular in the market. But how could the company ensure that it did not let the excitement and novelty of their products wear off, as it was this uniqueness that provided them with a strong competitive edge? Moreover, with growth and success came a different set of challenges. The team had grown, which meant that collaboration among the team members would have to be managed far more systematically, and processes would need to be implemented to manage the growing business effectively - but this could also potentially impede an intrinsically disorderly creative process. How best could Inoko successfully manage the spectacular growth of his company and the challenges that came with it, while nurturing the creative spark?


Case Authors : Ali Farhoomand, Havovi Joshi

Topic : Technology & Operations

Related Areas : Creativity, Design, Entrepreneurship, Organizational culture




Calculating Net Present Value (NPV) at 6% for Creativity in Design: Experimenting and Innovating at teamLab Japan Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10019448) -10019448 - -
Year 1 3458211 -6561237 3458211 0.9434 3262463
Year 2 3972487 -2588750 7430698 0.89 3535499
Year 3 3954014 1365264 11384712 0.8396 3319866
Year 4 3234094 4599358 14618806 0.7921 2561705
TOTAL 14618806 12679534


The Net Present Value at 6% discount rate is 2660086

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. Net Present Value
2. Payback Period
3. Profitability Index
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 Teamlab Inoko 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. Teamlab Inoko 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 Creativity in Design: Experimenting and Innovating at teamLab Japan

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 Teamlab Inoko 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 Teamlab Inoko 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 (10019448) -10019448 - -
Year 1 3458211 -6561237 3458211 0.8696 3007140
Year 2 3972487 -2588750 7430698 0.7561 3003771
Year 3 3954014 1365264 11384712 0.6575 2599828
Year 4 3234094 4599358 14618806 0.5718 1849104
TOTAL 10459843


The Net NPV after 4 years is 440395

(10459843 - 10019448 )






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 (10019448) -10019448 - -
Year 1 3458211 -6561237 3458211 0.8333 2881843
Year 2 3972487 -2588750 7430698 0.6944 2758672
Year 3 3954014 1365264 11384712 0.5787 2288203
Year 4 3234094 4599358 14618806 0.4823 1559652
TOTAL 9488368


The Net NPV after 4 years is -531080

At 20% discount rate the NPV is negative (9488368 - 10019448 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Teamlab Inoko 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 Teamlab Inoko has a NPV value higher than Zero then finance managers at Teamlab Inoko 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 Teamlab Inoko, then the stock price of the Teamlab Inoko 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 Teamlab Inoko 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 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.

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.

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.




References & Further Readings

Ali Farhoomand, Havovi Joshi (2018), "Creativity in Design: Experimenting and Innovating at teamLab Japan Harvard Business Review Case Study. Published by HBR Publications.