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NPV: The Walt Disney Company Net Present Value Case Analysis

The Walt Disney Company 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 Walt Disney Company case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Walt Disney Company case study is a Harvard Business School (HBR) case study written by Frank T. Rothaermel, Noorein Inamdar. The The Walt Disney Company (referred as “Disney Iger” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Leadership, Marketing, Organizational culture, Risk management, Strategy execution, Succession planning.

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 The Walt Disney Company Case Study

With 195,000 employees, operations in 45 countries, and $55 billion in annual revenues, Disney is the largest media and entertainment company in the world. The strategic leadership of Walt Disney, Michael Eisner, and Robert Iger was critical in turning Disney into such a colossus empire. The case covers the epic journey of Disney from its inception in 1923 to its record performance results in 2016. The case examines how Disney grew through the corporate strategies of vertical integration, diversification, and geographic expansion by leveraging the following core competencies: creative content, technology, synergy, and branding. The case opens with Robert Iger, the current CEO who is facing four major challenges: acquiring creative content, technology disruption, global resistance to Disney's association with "American imperialism," and finding a successor by 2019. These challenges involve further broadening the scope of Disney, having to face even more formidable competition from international companies as well as former customers such as Netflix, and possibly hiring an "untested" CEO who could derail Disney's past success.

Case Authors : Frank T. Rothaermel, Noorein Inamdar

Topic : Leadership & Managing People

Related Areas : Leadership, Marketing, Organizational culture, Risk management, Strategy execution, Succession planning

Calculating Net Present Value (NPV) at 6% for The Walt Disney Company Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10010147) -10010147 - -
Year 1 3452211 -6557936 3452211 0.9434 3256803
Year 2 3977991 -2579945 7430202 0.89 3540398
Year 3 3950017 1370072 11380219 0.8396 3316510
Year 4 3243438 4613510 14623657 0.7921 2569107
TOTAL 14623657 12682818

The Net Present Value at 6% discount rate is 2672671

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. Payback Period
2. Net Present Value
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 Disney Iger 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. Disney Iger 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 The Walt Disney Company

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 Leadership & Managing People 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 Disney Iger 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 Disney Iger 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 %
Cash Flows
Year 0 (10010147) -10010147 - -
Year 1 3452211 -6557936 3452211 0.8696 3001923
Year 2 3977991 -2579945 7430202 0.7561 3007933
Year 3 3950017 1370072 11380219 0.6575 2597200
Year 4 3243438 4613510 14623657 0.5718 1854446
TOTAL 10461502

The Net NPV after 4 years is 451355

(10461502 - 10010147 )

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 %
Cash Flows
Year 0 (10010147) -10010147 - -
Year 1 3452211 -6557936 3452211 0.8333 2876843
Year 2 3977991 -2579945 7430202 0.6944 2762494
Year 3 3950017 1370072 11380219 0.5787 2285889
Year 4 3243438 4613510 14623657 0.4823 1564158
TOTAL 9489384

The Net NPV after 4 years is -520763

At 20% discount rate the NPV is negative (9489384 - 10010147 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Disney Iger 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 Disney Iger has a NPV value higher than Zero then finance managers at Disney Iger 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 Disney Iger, then the stock price of the Disney Iger 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 Disney Iger 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 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 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.

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

Frank T. Rothaermel, Noorein Inamdar (2018), "The Walt Disney Company Harvard Business Review Case Study. Published by HBR Publications.