Stripe: Helping Money Move on the Internet, Spanish Version 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 Stripe: Helping Money Move on the Internet, Spanish Version case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Stripe: Helping Money Move on the Internet, Spanish Version case study is a Harvard Business School (HBR) case study written by Sarit Markovich, Nilima Achwal, Eric Queathem. The Stripe: Helping Money Move on the Internet, Spanish Version (referred as “Stripe Stripe's” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Decision making, Growth strategy, International business, Joint ventures, Market research, Mobile, Pricing, Research & development, Risk management.

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 Stripe: Helping Money Move on the Internet, Spanish Version Case Study

This case features Stripe, a startup that enables merchants to accept payments from customers on the web, on mobile devices, and at the point of sale (POS). Stripe was launched in 2011 by the Collison brothers and quickly gained traction with e-commerce startups, particularly software and platform developers who needed help building their payment processing infrastructures. Stripe incurred high fixed costs in developing its platform and had low margins per transaction, so the company needed to reach high processing volumes (i.e., scale) to survive. This was challenging, as Stripe competed with large payment processors and traditional banks that had high processing volumes and were able to offer merchants significantly lower rates than Stripe. Still, merchants valued Stripe's solution because it was simple and versatile. Students assume the role of the Collisons to think about possible strategies Stripe could pursue to process higher volumes of transactions. Students are challenged to think about the potential response of the incumbents to Stripe's different growth alternatives. The teaching note presents the Value Net framework and discusses the importance of considering complementors and their effect on a firm's strategy. Finally, a discussion about Stripe's potential entry into the Indian market allows students to apply the concepts they learned in the discussion of a new market.

Case Authors : Sarit Markovich, Nilima Achwal, Eric Queathem

Topic : Strategy & Execution

Related Areas : Decision making, Growth strategy, International business, Joint ventures, Market research, Mobile, Pricing, Research & development, Risk management

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Calculating Net Present Value (NPV) at 6% for Stripe: Helping Money Move on the Internet, Spanish Version Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10015964)	-10015964	-	-
Year 1	3470742	-6545222	3470742	0.9434	3274285
Year 2	3972326	-2572896	7443068	0.89	3535356
Year 3	3943805	1370909	11386873	0.8396	3311295
Year 4	3228841	4599750	14615714	0.7921	2557544
TOTAL			14615714		12678480

The Net Present Value at 6% discount rate is 2662516

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. Payback Period
2. Profitability Index
3. Net Present Value
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 Stripe Stripe's 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. Stripe Stripe's 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 Stripe: Helping Money Move on the Internet, Spanish Version

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 Stripe Stripe's 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 Stripe Stripe's 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	(10015964)	-10015964	-	-
Year 1	3470742	-6545222	3470742	0.8696	3018037
Year 2	3972326	-2572896	7443068	0.7561	3003649
Year 3	3943805	1370909	11386873	0.6575	2593116
Year 4	3228841	4599750	14615714	0.5718	1846100
TOTAL					10460902

The Net NPV after 4 years is 444938

(10460902 - 10015964 )

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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	(10015964)	-10015964	-	-
Year 1	3470742	-6545222	3470742	0.8333	2892285
Year 2	3972326	-2572896	7443068	0.6944	2758560
Year 3	3943805	1370909	11386873	0.5787	2282295
Year 4	3228841	4599750	14615714	0.4823	1557119
TOTAL					9490258

The Net NPV after 4 years is -525706

At 20% discount rate the NPV is negative (9490258 - 10015964 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Stripe Stripe's 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 Stripe Stripe's has a NPV value higher than Zero then finance managers at Stripe Stripe's 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 Stripe Stripe's, then the stock price of the Stripe Stripe's 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 Stripe Stripe's 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 key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

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

Understanding of risks involved in 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.

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 Stripe: Helping Money Move on the Internet, Spanish Version

References & Further Readings

Sarit Markovich, Nilima Achwal, Eric Queathem (2018), "Stripe: Helping Money Move on the Internet, Spanish Version Harvard Business Review Case Study. Published by HBR Publications.