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Trajectories to Reconcile Sharing and Commercialization in the Maker Movement 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 Trajectories to Reconcile Sharing and Commercialization in the Maker Movement case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Trajectories to Reconcile Sharing and Commercialization in the Maker Movement case study is a Harvard Business School (HBR) case study written by David J. Langley, Marthe Zirngiebl, Janosch Sbeih, Bart Devoldere. The Trajectories to Reconcile Sharing and Commercialization in the Maker Movement (referred as “Maker Makers” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Knowledge management, 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




Case Description of Trajectories to Reconcile Sharing and Commercialization in the Maker Movement Case Study


Maker technologies, including collaborative digital fabrication tools like 3-D printers, enable entrepreneurial opportunities and new business models. To date, relatively few highly successful maker startups have emerged, possibly due to the dominant mindset of the makers being one of cooperation and sharing. However, makers also strive for financial stability and many have profit motives. We use a multiple case study approach to explore makers' experiences regarding the tension between sharing and commercialization and their ways of dealing with it. We conducted interviews with maker initiatives across Europe including Fab Labs, a maker R&D center, and other networks of makers. We unpack and contextualize the concepts of sharing and commercialization. Our cross-case analysis leads to a new framework for understanding these entrepreneurs' position with respect to common-good versus commercial offerings. Using the framework, we describe archetypal trajectories that maker initiatives go through in the dynamic transition from makers to social enterprises and social entrepreneurs.


Case Authors : David J. Langley, Marthe Zirngiebl, Janosch Sbeih, Bart Devoldere

Topic : Innovation & Entrepreneurship

Related Areas : Knowledge management, Technology




Calculating Net Present Value (NPV) at 6% for Trajectories to Reconcile Sharing and Commercialization in the Maker Movement Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10018660) -10018660 - -
Year 1 3471828 -6546832 3471828 0.9434 3275309
Year 2 3978088 -2568744 7449916 0.89 3540484
Year 3 3964240 1395496 11414156 0.8396 3328452
Year 4 3245650 4641146 14659806 0.7921 2570859
TOTAL 14659806 12715105


The Net Present Value at 6% discount rate is 2696445

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. Profitability Index
2. Net Present Value
3. Internal Rate of Return
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 Maker Makers 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. Maker Makers 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 Trajectories to Reconcile Sharing and Commercialization in the Maker Movement

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 Innovation & Entrepreneurship 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 Maker Makers 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 Maker Makers 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 (10018660) -10018660 - -
Year 1 3471828 -6546832 3471828 0.8696 3018981
Year 2 3978088 -2568744 7449916 0.7561 3008006
Year 3 3964240 1395496 11414156 0.6575 2606552
Year 4 3245650 4641146 14659806 0.5718 1855711
TOTAL 10489250


The Net NPV after 4 years is 470590

(10489250 - 10018660 )






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 (10018660) -10018660 - -
Year 1 3471828 -6546832 3471828 0.8333 2893190
Year 2 3978088 -2568744 7449916 0.6944 2762561
Year 3 3964240 1395496 11414156 0.5787 2294120
Year 4 3245650 4641146 14659806 0.4823 1565225
TOTAL 9515096


The Net NPV after 4 years is -503564

At 20% discount rate the NPV is negative (9515096 - 10018660 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Maker Makers 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 Maker Makers has a NPV value higher than Zero then finance managers at Maker Makers 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 Maker Makers, then the stock price of the Maker Makers 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 Maker Makers 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.

Understanding of risks involved in the project.

What can impact the cash flow of the project.

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

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

David J. Langley, Marthe Zirngiebl, Janosch Sbeih, Bart Devoldere (2018), "Trajectories to Reconcile Sharing and Commercialization in the Maker Movement Harvard Business Review Case Study. Published by HBR Publications.

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