×




Mobike: A Smart Bike-Sharing Service Platform 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 Mobike: A Smart Bike-Sharing Service Platform case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Mobike: A Smart Bike-Sharing Service Platform case study is a Harvard Business School (HBR) case study written by Guijie Qi, Jiali Chen, John Zhang. The Mobike: A Smart Bike-Sharing Service Platform (referred as “Mobike Bike” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, 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






Case Description of Mobike: A Smart Bike-Sharing Service Platform Case Study


In 2017, bike sharing was one of the hottest technology trends in China. Since its inception two years earlier, Mobike had quickly become one of China's leading bike on-demand companies because of its bicycles' superior quality, and the company's intelligence capability, open innovation, alliance strategies, and big data applications. Mobike expanded aggressively to take advantage of opportunities in this emerging market and the need for efficient, green, and sustainable solutions to short-distance urban transportation. However, Mobike's aggressive expansion faced tough challenges, including shared bicycle operations and management, competition from rivals, and government regulations. By late 2017, several bike-sharing services had gone bankrupt. How could Mobike avoid the same fate, generate profit, and continue to prosper? The authors Guijie Qi and Jiali Chen are affiliated with Shandong University. John Zhang is affiliated with Arizona State University.


Case Authors : Guijie Qi, Jiali Chen, John Zhang

Topic : Global Business

Related Areas : Strategy




Calculating Net Present Value (NPV) at 6% for Mobike: A Smart Bike-Sharing Service Platform Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10000545) -10000545 - -
Year 1 3463433 -6537112 3463433 0.9434 3267390
Year 2 3971122 -2565990 7434555 0.89 3534284
Year 3 3969609 1403619 11404164 0.8396 3332960
Year 4 3236052 4639671 14640216 0.7921 2563256
TOTAL 14640216 12697891




The Net Present Value at 6% discount rate is 2697346

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 Mobike Bike 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. Mobike Bike 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 Mobike: A Smart Bike-Sharing Service Platform

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 Global Business 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 Mobike Bike 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 Mobike Bike 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 (10000545) -10000545 - -
Year 1 3463433 -6537112 3463433 0.8696 3011681
Year 2 3971122 -2565990 7434555 0.7561 3002739
Year 3 3969609 1403619 11404164 0.6575 2610082
Year 4 3236052 4639671 14640216 0.5718 1850223
TOTAL 10474725


The Net NPV after 4 years is 474180

(10474725 - 10000545 )








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 (10000545) -10000545 - -
Year 1 3463433 -6537112 3463433 0.8333 2886194
Year 2 3971122 -2565990 7434555 0.6944 2757724
Year 3 3969609 1403619 11404164 0.5787 2297227
Year 4 3236052 4639671 14640216 0.4823 1560596
TOTAL 9501741


The Net NPV after 4 years is -498804

At 20% discount rate the NPV is negative (9501741 - 10000545 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Mobike Bike 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 Mobike Bike has a NPV value higher than Zero then finance managers at Mobike Bike 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 Mobike Bike, then the stock price of the Mobike Bike 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 Mobike Bike 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 will be a multi year spillover effect of various taxation regulations.

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.

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.






Negotiation Strategy of Mobike: A Smart Bike-Sharing Service Platform

References & Further Readings

Guijie Qi, Jiali Chen, John Zhang (2018), "Mobike: A Smart Bike-Sharing Service Platform Harvard Business Review Case Study. Published by HBR Publications.


DanDrit Biotech SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Nisso Corp SWOT Analysis / TOWS Matrix

Services , Business Services


Banners SWOT Analysis / TOWS Matrix

Services , Retail (Specialty)


Tonnellerie Francois Freres SWOT Analysis / TOWS Matrix

Basic Materials , Containers & Packaging


JPMorgan Smaller SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Anhui Quanchai Engine SWOT Analysis / TOWS Matrix

Capital Goods , Misc. Capital Goods


Lycopodium SWOT Analysis / TOWS Matrix

Services , Business Services


Atkore Intl SWOT Analysis / TOWS Matrix

Capital Goods , Constr. - Supplies & Fixtures


TOA Co SWOT Analysis / TOWS Matrix

Consumer Cyclical , Audio & Video Equipment


Samyoung M Tek SWOT Analysis / TOWS Matrix

Basic Materials , Misc. Fabricated Products