Jibo: A Social Robot for the Home 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 Jibo: A Social Robot for the Home case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Jibo: A Social Robot for the Home case study is a Harvard Business School (HBR) case study written by Jeffrey J. Bussgang, Christine Snively. The Jibo: A Social Robot for the Home (referred as “Jibo Jibo's” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Organizational structure, Technology.

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 Jibo: A Social Robot for the Home Case Study

In January 2015, Jibo Inc. had completed a raise of $25.3 million in Series A financing after a successful 2014 crowdfunding campaign for pre-orders of Jibo, the first social robot for the home. Over 4,800 Jibo units were pre-ordered, generating $2.6 million in sales. On one snowy morning in January, CEO Steve Chambers met with co-founder and Chief Scientist Dr. Cynthia Breazeal and newly-hired VP of Consumer & Development Relations Lynda Smith to prepare for their first meeting with the board. The team planned to discuss Jibo's business development strategy, and considered how best to engage with the developer community to expand Jibo's portfolio of capabilities. How could the team best attract third-party developers to create Jibo Skills (apps) for this new platform that would not ship until 2016? Should the team develop a full set of Jibo Skills in-house? The team also hoped to establish partnerships with large content providers. How could they convince potential partners that Jibo was a worthwhile investment?

Case Authors : Jeffrey J. Bussgang, Christine Snively

Topic : Innovation & Entrepreneurship

Related Areas : Organizational structure, Technology

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Calculating Net Present Value (NPV) at 6% for Jibo: A Social Robot for the Home Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014581)	-10014581	-	-
Year 1	3470219	-6544362	3470219	0.9434	3273792
Year 2	3972439	-2571923	7442658	0.89	3535457
Year 3	3972233	1400310	11414891	0.8396	3335163
Year 4	3245472	4645782	14660363	0.7921	2570718
TOTAL			14660363		12715129

The Net Present Value at 6% discount rate is 2700548

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 Jibo Jibo'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. Jibo Jibo'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 Jibo: A Social Robot for the Home

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 Jibo Jibo'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 Jibo Jibo'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	(10014581)	-10014581	-	-
Year 1	3470219	-6544362	3470219	0.8696	3017582
Year 2	3972439	-2571923	7442658	0.7561	3003735
Year 3	3972233	1400310	11414891	0.6575	2611808
Year 4	3245472	4645782	14660363	0.5718	1855609
TOTAL					10488733

The Net NPV after 4 years is 474152

(10488733 - 10014581 )

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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	(10014581)	-10014581	-	-
Year 1	3470219	-6544362	3470219	0.8333	2891849
Year 2	3972439	-2571923	7442658	0.6944	2758638
Year 3	3972233	1400310	11414891	0.5787	2298746
Year 4	3245472	4645782	14660363	0.4823	1565139
TOTAL					9514372

The Net NPV after 4 years is -500209

At 20% discount rate the NPV is negative (9514372 - 10014581 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Jibo Jibo'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 Jibo Jibo's has a NPV value higher than Zero then finance managers at Jibo Jibo'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 Jibo Jibo's, then the stock price of the Jibo Jibo'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 Jibo Jibo'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 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.

Understanding of risks involved in the project.

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

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 Jibo: A Social Robot for the Home

References & Further Readings

Jeffrey J. Bussgang, Christine Snively (2018), "Jibo: A Social Robot for the Home Harvard Business Review Case Study. Published by HBR Publications.