Investcorp and the Moneybookers Bid 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 Investcorp and the Moneybookers Bid case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Investcorp and the Moneybookers Bid case study is a Harvard Business School (HBR) case study written by Matthew Rhodes-Kropf, Carin-Isabel Knoop, Nori Gerardo Lietz. The Investcorp and the Moneybookers Bid (referred as “Moneybookers Gacem” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Financial analysis, Financial management, Negotiations.

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 Investcorp and the Moneybookers Bid Case Study

In January 2007, Hazem Ben-Gacem, managing director and co-head of Investcorp Technology Partners (ITP), needs to decide what to bid at an auction for Moneybookers Limited, one of the top three e-payment solution providers in Europe. However, approximately 70% of Moneybookers revenues were related to transactions from online gaming sites (down from 100% in 2002). Although the thesis was that e-commerce transactions would soon make up a much larger chunk of the company's revenues, high gaming revenue still raised some questions. Between now and when Ben-Gacem had first submitted a bid of a??60 million for Moneybookers back in November 2006, the U.S. Congress had enacted the Unlawful Internet Gambling Enforcement Act putting pressure on e-payment firms with gambling exposure. How would investors in ITP view this transaction? Ben-Gacem also worried about whether Moneybookers could manage the growth of its business and the evolution of regulation around monetary transactions. Moneybookers had effectively become a type of bank with deposit accounts and capital adequacy requirements and all the reporting that went along with it. But could an internet startup maintain the compliance and accounting standards necessary to handle such scrutiny? Could it succeed-and if it did, what would it be worth?

Case Authors : Matthew Rhodes-Kropf, Carin-Isabel Knoop, Nori Gerardo Lietz

Topic : Innovation & Entrepreneurship

Related Areas : Financial analysis, Financial management, Negotiations

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Calculating Net Present Value (NPV) at 6% for Investcorp and the Moneybookers Bid Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10019043)	-10019043	-	-
Year 1	3472670	-6546373	3472670	0.9434	3276104
Year 2	3957995	-2588378	7430665	0.89	3522601
Year 3	3961818	1373440	11392483	0.8396	3326419
Year 4	3242377	4615817	14634860	0.7921	2568266
TOTAL			14634860		12693390

The Net Present Value at 6% discount rate is 2674347

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. 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 Moneybookers Gacem 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. Moneybookers Gacem 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 Investcorp and the Moneybookers Bid

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 Innovation & Entrepreneurship 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 Moneybookers Gacem 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 Moneybookers Gacem 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	(10019043)	-10019043	-	-
Year 1	3472670	-6546373	3472670	0.8696	3019713
Year 2	3957995	-2588378	7430665	0.7561	2992813
Year 3	3961818	1373440	11392483	0.6575	2604960
Year 4	3242377	4615817	14634860	0.5718	1853840
TOTAL					10471325

The Net NPV after 4 years is 452282

(10471325 - 10019043 )

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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	(10019043)	-10019043	-	-
Year 1	3472670	-6546373	3472670	0.8333	2893892
Year 2	3957995	-2588378	7430665	0.6944	2748608
Year 3	3961818	1373440	11392483	0.5787	2292719
Year 4	3242377	4615817	14634860	0.4823	1563646
TOTAL					9498864

The Net NPV after 4 years is -520179

At 20% discount rate the NPV is negative (9498864 - 10019043 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Moneybookers Gacem 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 Moneybookers Gacem has a NPV value higher than Zero then finance managers at Moneybookers Gacem 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 Moneybookers Gacem, then the stock price of the Moneybookers Gacem 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 Moneybookers Gacem 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 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.

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 Investcorp and the Moneybookers Bid

References & Further Readings

Matthew Rhodes-Kropf, Carin-Isabel Knoop, Nori Gerardo Lietz (2018), "Investcorp and the Moneybookers Bid Harvard Business Review Case Study. Published by HBR Publications.