AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb 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 AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb case study is a Harvard Business School (HBR) case study written by Tawfik Jelassi, Valerie Keller-Birrer. The AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb (referred as “Digital Accorhotels” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Disruptive innovation, Economy, Strategy.

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 AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb Case Study

The hotel industry is being disrupted by new digital players who have entered the market and challenge the conventional hospitality approach. The sharing economy in particular, with the Airbnb start-up in the lead, has created a major challenge, if not a threat, to established hotel chains. As a response, AccorHotels, Europe's leading hotel group, is going through a major digital transformation that impacts its corporate culture, organizational structure, value proposition, and overall business model. The goal is to turn the traditional asset-heavy company into an active player in the new hospitality economy, able to compete head-on with the industry's digital disruptors. Learning objective: The case discusses the strategic response of industry incumbents to the challenges coming from digital disruptors. Participants will be asked to compare the two business models from different angles: how do the different approaches deliver on the consumer proposition, and which are the strengths and weaknesses of each business model. Participants will further be asked to assess the strategic options of an asset-heavy incumbent to react to asset-light competitors in a context of digital disruption. The case serves as a basis to discuss the opportunities and challenges of industry incumbents to transform themselves and better compete in an increasingly digital business environment.

Case Authors : Tawfik Jelassi, Valerie Keller-Birrer

Topic : Strategy & Execution

Related Areas : Disruptive innovation, Economy, Strategy

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Calculating Net Present Value (NPV) at 6% for AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10024338)	-10024338	-	-
Year 1	3468361	-6555977	3468361	0.9434	3272039
Year 2	3959167	-2596810	7427528	0.89	3523645
Year 3	3961128	1364318	11388656	0.8396	3325839
Year 4	3236654	4600972	14625310	0.7921	2563733
TOTAL			14625310		12685256

The Net Present Value at 6% discount rate is 2660918

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. Profitability Index
3. Payback Period
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 Digital Accorhotels 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. Digital Accorhotels shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb

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 Strategy & Execution 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 Digital Accorhotels 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 Digital Accorhotels 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	(10024338)	-10024338	-	-
Year 1	3468361	-6555977	3468361	0.8696	3015966
Year 2	3959167	-2596810	7427528	0.7561	2993699
Year 3	3961128	1364318	11388656	0.6575	2604506
Year 4	3236654	4600972	14625310	0.5718	1850567
TOTAL					10464739

The Net NPV after 4 years is 440401

(10464739 - 10024338 )

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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	(10024338)	-10024338	-	-
Year 1	3468361	-6555977	3468361	0.8333	2890301
Year 2	3959167	-2596810	7427528	0.6944	2749422
Year 3	3961128	1364318	11388656	0.5787	2292319
Year 4	3236654	4600972	14625310	0.4823	1560886
TOTAL					9492928

The Net NPV after 4 years is -531410

At 20% discount rate the NPV is negative (9492928 - 10024338 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Digital Accorhotels 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 Digital Accorhotels has a NPV value higher than Zero then finance managers at Digital Accorhotels 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 Digital Accorhotels, then the stock price of the Digital Accorhotels 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 Digital Accorhotels 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 will be a multi year spillover effect of various taxation regulations.

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.

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Negotiation Strategy of AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb

References & Further Readings

Tawfik Jelassi, Valerie Keller-Birrer (2018), "AccorHotels' Digital Transformation: A Response to Hospitality Disruptor Airbnb Harvard Business Review Case Study. Published by HBR Publications.