Spreading Academic Entrepreneurship: Made in Mexico 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 Spreading Academic Entrepreneurship: Made in Mexico case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Spreading Academic Entrepreneurship: Made in Mexico case study is a Harvard Business School (HBR) case study written by Francisco J. Cantu-Ortiz, Nathalie Galeano, Patricia Mora-Castro, James Fangmeyer Jr.. The Spreading Academic Entrepreneurship: Made in Mexico (referred as “Entrepreneurship Academic” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. 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 Spreading Academic Entrepreneurship: Made in Mexico Case Study

This work presents REPITA (Research-Ecosystem-People-Intellectual Property-Transfer-Alignment), a prescriptive and repeatable model for successful technology-based academic entrepreneurship, synthesized from research of academic entrepreneurship in developing economy conditions. In this work, we identify three deficiencies in Mexico's entrepreneurship ecosystem: research skills, high technology, and technology transfer. We then present a solution that has been recognized by the Organization for Economic Co-operation and Development (OECD) for fueling high-tech university spin-offs with science and technology doctoral research. Lessons from 48 spin-off projects are synthesized in the newly proposed REPITA model, which prescribes connecting a basic research platform to applications, catalyzing the entrepreneurship ecosystem with resources and incentives, combining highly specialized people in entrepreneurial teams, setting generous and flexible intellectual property policies for the knowledge economy, transferring technology per entry and exit strategies, and aligning technology and business incubation. Finally, we propose a tool that presents academic entrepreneurship theories in an actionable format for university administrators and entrepreneurs. These results are not a theoretical framework on their own, but rather a real-world organizational model based on theory for impelling technology-based, academic spin-offs with economic impact. Taken together, this contribution may be useful to practitioners and provocative for researchers.

Case Authors : Francisco J. Cantu-Ortiz, Nathalie Galeano, Patricia Mora-Castro, James Fangmeyer Jr.

Topic : Innovation & Entrepreneurship

Related Areas : Technology

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Calculating Net Present Value (NPV) at 6% for Spreading Academic Entrepreneurship: Made in Mexico Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10021678)	-10021678	-	-
Year 1	3461222	-6560456	3461222	0.9434	3265304
Year 2	3973568	-2586888	7434790	0.89	3536461
Year 3	3963884	1376996	11398674	0.8396	3328153
Year 4	3223714	4600710	14622388	0.7921	2553483
TOTAL			14622388		12683402

The Net Present Value at 6% discount rate is 2661724

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. Net Present Value
2. Internal Rate of Return
3. Payback Period
4. Profitability Index

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. Entrepreneurship Academic 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 Entrepreneurship Academic 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 Spreading Academic Entrepreneurship: Made in Mexico

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 Entrepreneurship Academic 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 Entrepreneurship Academic 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	(10021678)	-10021678	-	-
Year 1	3461222	-6560456	3461222	0.8696	3009758
Year 2	3973568	-2586888	7434790	0.7561	3004588
Year 3	3963884	1376996	11398674	0.6575	2606318
Year 4	3223714	4600710	14622388	0.5718	1843169
TOTAL					10463834

The Net NPV after 4 years is 442156

(10463834 - 10021678 )

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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	(10021678)	-10021678	-	-
Year 1	3461222	-6560456	3461222	0.8333	2884352
Year 2	3973568	-2586888	7434790	0.6944	2759422
Year 3	3963884	1376996	11398674	0.5787	2293914
Year 4	3223714	4600710	14622388	0.4823	1554646
TOTAL					9492334

The Net NPV after 4 years is -529344

At 20% discount rate the NPV is negative (9492334 - 10021678 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Entrepreneurship Academic 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 Entrepreneurship Academic has a NPV value higher than Zero then finance managers at Entrepreneurship Academic 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 Entrepreneurship Academic, then the stock price of the Entrepreneurship Academic 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 Entrepreneurship Academic 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.

What can impact the cash flow of the project.

Understanding of risks involved in 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.

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Negotiation Strategy of Spreading Academic Entrepreneurship: Made in Mexico

References & Further Readings

Francisco J. Cantu-Ortiz, Nathalie Galeano, Patricia Mora-Castro, James Fangmeyer Jr. (2018), "Spreading Academic Entrepreneurship: Made in Mexico Harvard Business Review Case Study. Published by HBR Publications.