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Tristan Walker: The Extroverted Introvert 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 Tristan Walker: The Extroverted Introvert case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Tristan Walker: The Extroverted Introvert case study is a Harvard Business School (HBR) case study written by Jeffrey Pfeffer. The Tristan Walker: The Extroverted Introvert (referred as “Walker Gsb” 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, Influence, Networking.

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 Tristan Walker: The Extroverted Introvert Case Study


Tristan Walker was a 32-year-old entrepreneur. A visionary thinker and GSB graduate, Walker had accomplished much in his short career, and had worked briefly at Twitter, Foursquare, and Andreessen Horowitz before founding his own company, Walker & Company Brands. Walker was also the chair and cofounder of Code 2040, a nonprofit that helped underrepresented minorities chart successful pathways in the technology sector. Tristan Walker grew up in Queens, NY, where a Boys' Club program led him to a scholarship at the Hotchkiss School, a Connecticut prep school. From there he attended SUNY-Stony Brook, planning to head into the financial world. A brief stint on Wall Street convinced him otherwise, so he applied to Stanford GSB. Walker spent his time at the GSB building a solid network of connections and mentors. During his first year at GSB, Walker found himself in the right place at the right time when he interned at Twitter, and embraced the company's role in changing global communication. His next move was to jump to Foursquare, a company with an app that let users share information about nearby businesses and attractions. Walker's perseverance was legendary-he announced he was coming to work there, showed up and signed up merchants, and ended up head of business development. Much of the case describes how Walker decided on the goals of his own enterprise and how he launched his vision. As an entrepreneur-in-residence at Andreessen Horowitz, Walker concentrated on coming up with a fresh idea. The realization that African Americans could avoid razor bumps by using different shaving products resonated with him, and he could see there was an opportunity to serve this underrepresented market. So he set out to make health and beauty products tailored for the comfort and benefit of people of color. Walker's extensive contacts and immense following on Twitter, and his range of experiences all helped prepare him for the launch of Walker & Company in 2013.


Case Authors : Jeffrey Pfeffer

Topic : Innovation & Entrepreneurship

Related Areas : Entrepreneurship, Influence, Networking




Calculating Net Present Value (NPV) at 6% for Tristan Walker: The Extroverted Introvert Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10012925) -10012925 - -
Year 1 3471295 -6541630 3471295 0.9434 3274807
Year 2 3960663 -2580967 7431958 0.89 3524976
Year 3 3967815 1386848 11399773 0.8396 3331454
Year 4 3227276 4614124 14627049 0.7921 2556305
TOTAL 14627049 12687541




The Net Present Value at 6% discount rate is 2674616

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. Net Present Value
2. Profitability Index
3. Payback Period
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 Walker Gsb 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. Walker Gsb shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.






Formula and Steps to Calculate Net Present Value (NPV) of Tristan Walker: The Extroverted Introvert

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 Walker Gsb 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 Walker Gsb 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 (10012925) -10012925 - -
Year 1 3471295 -6541630 3471295 0.8696 3018517
Year 2 3960663 -2580967 7431958 0.7561 2994830
Year 3 3967815 1386848 11399773 0.6575 2608903
Year 4 3227276 4614124 14627049 0.5718 1845206
TOTAL 10467456


The Net NPV after 4 years is 454531

(10467456 - 10012925 )








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 (10012925) -10012925 - -
Year 1 3471295 -6541630 3471295 0.8333 2892746
Year 2 3960663 -2580967 7431958 0.6944 2750460
Year 3 3967815 1386848 11399773 0.5787 2296189
Year 4 3227276 4614124 14627049 0.4823 1556364
TOTAL 9495759


The Net NPV after 4 years is -517166

At 20% discount rate the NPV is negative (9495759 - 10012925 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Walker Gsb 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 Walker Gsb has a NPV value higher than Zero then finance managers at Walker Gsb 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 Walker Gsb, then the stock price of the Walker Gsb 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 Walker Gsb 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.

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.

Understanding of risks involved in the project.

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.






Negotiation Strategy of Tristan Walker: The Extroverted Introvert

References & Further Readings

Jeffrey Pfeffer (2018), "Tristan Walker: The Extroverted Introvert Harvard Business Review Case Study. Published by HBR Publications.


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