The Next Wave of Business Models in Asia 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 Next Wave of Business Models in Asia case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. The Next Wave of Business Models in Asia case study is a Harvard Business School (HBR) case study written by Asher Devang, Christian Kruse, Andy Parker, Pontus M.A. Siren. The The Next Wave of Business Models in Asia (referred as “Viki Subtitles” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, Entrepreneurship.

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 The Next Wave of Business Models in Asia Case Study

This is an MIT Sloan Management Review Article. The global appetite for Korean entertainment - movies, TV shows, and music videos - has exploded in recent years. For non-Korean-speaking viewers, subtitles are crucial to the experience. Enter Viki Inc., a company that hosts content for streaming and provides subtitles and closed captions. Viki both eliminates language barriers and introduces the content to an otherwise unserved audience. Traditionally, subtitles are created by a bilingual translator hired by the producer or broadcaster. But the process is expensive and slow to scale. To overcome these challenges, Viki developed a business model leveraging a community of more than 150,000 volunteers. This model allows Viki to crowdsource subtitles for Asian content in numerous languages. Viki rewards volunteers with gamified badges, the ability to view videos not otherwise available in their region, early access to new shows, and an advertising-free, high-definition experience of the content. The combination of rapidly increasing internet video adoption rates and a greater appetite for foreign content - both in Asia and globally - has become a big opportunity for Viki, which was acquired by Tokyo-based Rakuten Inc. for a reported price of $200 million in 2013. The authors argue that Viki's story exemplifies a larger trend playing out in Asia. They see Viki as an archetype of a new generation of companies leveraging business model innovation to drive growth in Asia. But to understand this type of business model innovation in its proper context, it's important to understand Viki's forerunners. The authors describe two distinct, yet overlapping, waves of business innovation from emerging markets in Asia in recent years: one decades old and still going, and another that is newer and includes companies like Viki. The first wave primarily exploited differences in labor and other input costs between developed and developing markets. By contrast, the second wave is driven primarily by business model innovation and typically leverages new technology. These companies are characterized by extensive and often radical reconfigurations of the profit formula, resources, processes, and relationships within a broader stakeholder ecosystem. They may have a global orientation from the start.

Case Authors : Asher Devang, Christian Kruse, Andy Parker, Pontus M.A. Siren

Topic : Global Business

Related Areas : Entrepreneurship

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Calculating Net Present Value (NPV) at 6% for The Next Wave of Business Models in Asia Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10022387)	-10022387	-	-
Year 1	3454562	-6567825	3454562	0.9434	3259021
Year 2	3960269	-2607556	7414831	0.89	3524625
Year 3	3938570	1331014	11353401	0.8396	3306899
Year 4	3251570	4582584	14604971	0.7921	2575548
TOTAL			14604971		12666093

The Net Present Value at 6% discount rate is 2643706

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

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. Viki Subtitles 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 Viki Subtitles 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 The Next Wave of Business Models in Asia

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 Viki Subtitles 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 Viki Subtitles 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	(10022387)	-10022387	-	-
Year 1	3454562	-6567825	3454562	0.8696	3003967
Year 2	3960269	-2607556	7414831	0.7561	2994532
Year 3	3938570	1331014	11353401	0.6575	2589674
Year 4	3251570	4582584	14604971	0.5718	1859096
TOTAL					10447269

The Net NPV after 4 years is 424882

(10447269 - 10022387 )

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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	(10022387)	-10022387	-	-
Year 1	3454562	-6567825	3454562	0.8333	2878802
Year 2	3960269	-2607556	7414831	0.6944	2750187
Year 3	3938570	1331014	11353401	0.5787	2279265
Year 4	3251570	4582584	14604971	0.4823	1568080
TOTAL					9476333

The Net NPV after 4 years is -546054

At 20% discount rate the NPV is negative (9476333 - 10022387 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Viki Subtitles 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 Viki Subtitles has a NPV value higher than Zero then finance managers at Viki Subtitles 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 Viki Subtitles, then the stock price of the Viki Subtitles 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 Viki Subtitles 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 can impact the cash flow of the project.

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.

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 The Next Wave of Business Models in Asia

References & Further Readings

Asher Devang, Christian Kruse, Andy Parker, Pontus M.A. Siren (2018), "The Next Wave of Business Models in Asia Harvard Business Review Case Study. Published by HBR Publications.