The Weather Company: Creating Consumer Apps that Leverage its Big Data 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 The Weather Company: Creating Consumer Apps that Leverage its Big Data case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Weather Company: Creating Consumer Apps that Leverage its Big Data case study is a Harvard Business School (HBR) case study written by Ruth Gilleran, Patricia J. Guinan, Salvatore Parise. The The Weather Company: Creating Consumer Apps that Leverage its Big Data (referred as “Twc Weather” 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.

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 The Weather Company: Creating Consumer Apps that Leverage its Big Data Case Study

The Weather Company (TWC) was innovating by leveraging its big data on weather to create new consumer products. Weather was the original big data problem and over the years, TWC has capitalized on this data with its engaging TV coverage on The Weather Channel, as well as its popular website and mobile app. Recently, looking for new uses for its weather data, the company decided to build weather-related apps targeting outdoor enthusiasts. To crowd-source ideas for these apps, TWC invited all employees to a company-wide "hackathon" where they were asked to create a mobile app prototype for a segment of this population. At the end of the three-day event, everyone demonstrated their prototypes and the company executives decided to pursue OutSider, a mobile app for runners. Like most media sites, TWC employed an advertising-based revenue model. While TWC had millions of TV viewers and website visitors, it had limited information about them. However, with the profile information offered up by runners when they registered to use the OutSider app, as well as the data gathered by the smartphone sensors, TWC was poised to charge a premium for the vendor advertisements placed within the app. As well as illustrating the significance of leveraging data assets to create new products and services, the case also provides an example of the intersection of mobile and big data. When asked to name an innovative company, TWC would most likely not be top-of-mind for most individuals, yet the 30-year-old company was very entrepreneurial in its approach to consumer mobile app development. In addition to outlining TWC's ideation process, the case describes the composition of the mobile app development team, the implementation of agile software development methods, and its use of modern big data technologies. Finally, the case reviews the OutSider app's features and describes its competition. Readers are asked to contemplate how TWC can best leverage its weather data to increase its revenue going forward.

Case Authors : Ruth Gilleran, Patricia J. Guinan, Salvatore Parise

Topic : Technology & Operations

Related Areas : IT

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Calculating Net Present Value (NPV) at 6% for The Weather Company: Creating Consumer Apps that Leverage its Big Data Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10000187)	-10000187	-	-
Year 1	3469727	-6530460	3469727	0.9434	3273327
Year 2	3980711	-2549749	7450438	0.89	3542819
Year 3	3943549	1393800	11393987	0.8396	3311080
Year 4	3233435	4627235	14627422	0.7921	2561183
TOTAL			14627422		12688409

The Net Present Value at 6% discount rate is 2688222

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. Profitability Index
3. Net Present Value
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. Twc Weather 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 Twc Weather 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 The Weather Company: Creating Consumer Apps that Leverage its Big Data

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 Twc Weather 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 Twc Weather 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	(10000187)	-10000187	-	-
Year 1	3469727	-6530460	3469727	0.8696	3017154
Year 2	3980711	-2549749	7450438	0.7561	3009989
Year 3	3943549	1393800	11393987	0.6575	2592947
Year 4	3233435	4627235	14627422	0.5718	1848727
TOTAL					10468818

The Net NPV after 4 years is 468631

(10468818 - 10000187 )

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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	(10000187)	-10000187	-	-
Year 1	3469727	-6530460	3469727	0.8333	2891439
Year 2	3980711	-2549749	7450438	0.6944	2764383
Year 3	3943549	1393800	11393987	0.5787	2282146
Year 4	3233435	4627235	14627422	0.4823	1559334
TOTAL					9497302

The Net NPV after 4 years is -502885

At 20% discount rate the NPV is negative (9497302 - 10000187 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Twc Weather 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 Twc Weather has a NPV value higher than Zero then finance managers at Twc Weather 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 Twc Weather, then the stock price of the Twc Weather 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 Twc Weather 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 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.

Understanding of risks involved in 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.

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 The Weather Company: Creating Consumer Apps that Leverage its Big Data

References & Further Readings

Ruth Gilleran, Patricia J. Guinan, Salvatore Parise (2018), "The Weather Company: Creating Consumer Apps that Leverage its Big Data Harvard Business Review Case Study. Published by HBR Publications.