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HA?vding: The Airbag for Cyclists 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 HA?vding: The Airbag for Cyclists case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. HA?vding: The Airbag for Cyclists case study is a Harvard Business School (HBR) case study written by Joseph Fuller, Emilie Billaud. The HA?vding: The Airbag for Cyclists (referred as “Alstin Haupt” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Entrepreneurship, Leadership transitions.

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 HA?vding: The Airbag for Cyclists Case Study


In 2012, Anna Haupt and Terese Alstin, cofounders of the HA?vding company, reflect on the evolution of their venture and the way forward. Since 2005, Haupt and Alstin had been working on a new type of bicycle helmet-an "airbag for cyclists". What had begun as a thesis had grown into a seven-year journey of research and development, including raising over $5 million of venture capital. The product had been granted Europe's CE certification in 2011 and had been launched simultaneously in Sweden and Norway. Yet, a year later, the company had still not reached the breakeven point. To help them establish a commercialization strategy, the HA?vding board had prevailed upon the founders to hire a professional CEO. But surrendering management control was an emotional process for Haupt and Alstin, while the CEO struggled to assert his leadership and build the company's commercial capabilities. Should Haupt and Alstin collaborate with their CEO despite their misgivings or should they step away from the company they had dedicated seven years to building?


Case Authors : Joseph Fuller, Emilie Billaud

Topic : Innovation & Entrepreneurship

Related Areas : Entrepreneurship, Leadership transitions




Calculating Net Present Value (NPV) at 6% for HA?vding: The Airbag for Cyclists Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10008371) -10008371 - -
Year 1 3451224 -6557147 3451224 0.9434 3255872
Year 2 3958932 -2598215 7410156 0.89 3523435
Year 3 3970715 1372500 11380871 0.8396 3333889
Year 4 3238688 4611188 14619559 0.7921 2565344
TOTAL 14619559 12678540


The Net Present Value at 6% discount rate is 2670169

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. Internal Rate of Return
4. Profitability Index

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. Alstin Haupt 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 Alstin Haupt have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.




Formula and Steps to Calculate Net Present Value (NPV) of HA?vding: The Airbag for Cyclists

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 Alstin Haupt 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 Alstin Haupt 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 (10008371) -10008371 - -
Year 1 3451224 -6557147 3451224 0.8696 3001064
Year 2 3958932 -2598215 7410156 0.7561 2993521
Year 3 3970715 1372500 11380871 0.6575 2610810
Year 4 3238688 4611188 14619559 0.5718 1851730
TOTAL 10457126


The Net NPV after 4 years is 448755

(10457126 - 10008371 )






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 (10008371) -10008371 - -
Year 1 3451224 -6557147 3451224 0.8333 2876020
Year 2 3958932 -2598215 7410156 0.6944 2749258
Year 3 3970715 1372500 11380871 0.5787 2297867
Year 4 3238688 4611188 14619559 0.4823 1561867
TOTAL 9485013


The Net NPV after 4 years is -523358

At 20% discount rate the NPV is negative (9485013 - 10008371 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Alstin Haupt 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 Alstin Haupt has a NPV value higher than Zero then finance managers at Alstin Haupt 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 Alstin Haupt, then the stock price of the Alstin Haupt 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 Alstin Haupt 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.

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.




References & Further Readings

Joseph Fuller, Emilie Billaud (2018), "HA?vding: The Airbag for Cyclists Harvard Business Review Case Study. Published by HBR Publications.