Yemeksepeti: Growing and Expanding the Business Model through Data 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 Yemeksepeti: Growing and Expanding the Business Model through Data case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Yemeksepeti: Growing and Expanding the Business Model through Data case study is a Harvard Business School (HBR) case study written by William R. Kerr, Gamze Yucaoglu, Eren Kuzucu. The Yemeksepeti: Growing and Expanding the Business Model through Data (referred as “Aydin Yemeksepeti” from here on) case study provides evaluation & decision scenario in field of Innovation & Entrepreneurship. It also touches upon business topics such as - Value proposition, Change management, Customers, Data, Emerging markets, Entrepreneurial management, Growth strategy, Internet, IT, Supply chain.

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 Yemeksepeti: Growing and Expanding the Business Model through Data Case Study

In October 2016, Nevzat Aydin, co-founder and CEO of Yemeksepeti, the Turkish online food-ordering company, was looking over the company's quarterly results and projections for the upcoming year with his management team. It had been almost a year and a half since Aydin had agreed to sell the company's shares to Delivery Hero, the Berlin-based global leader in online and mobile food ordering, for $589 million. In 2016, the company had had grown to include more than 13,000 member restaurants servicing six million users and achieved a 41% year-on-year growth. Yemeksepeti operated with an EBITDA margin of over 50%. Although the company had introduced other revenue streams over the years, commissions remained as the main source of income. Aydin believed that, while there was plenty of room to grow by taking market share from phone orders, much could be done by revenue diversification; the company simply had too much valuable data to be ignored. What should the company do to take advantage of its data analysis capabilities and the new technologies on the market? What kind of outside-the-box solutions could create additional revenue streams and vertical growth capabilities? What about the cohort analysis and data generated from order histories? He motivated his the management team to come up with new ideas to put the vast amount of transaction data to use. The case describes potential avenues for a company to monetize its data, illustrates the pros and cons of each option. The case will help students think about how to prioritize growth over diversification, and forward think with regards to new technologies and customer trends.

Case Authors : William R. Kerr, Gamze Yucaoglu, Eren Kuzucu

Topic : Innovation & Entrepreneurship

Related Areas : Change management, Customers, Data, Emerging markets, Entrepreneurial management, Growth strategy, Internet, IT, Supply chain

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Calculating Net Present Value (NPV) at 6% for Yemeksepeti: Growing and Expanding the Business Model through Data Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027196)	-10027196	-	-
Year 1	3465393	-6561803	3465393	0.9434	3269239
Year 2	3969689	-2592114	7435082	0.89	3533009
Year 3	3952837	1360723	11387919	0.8396	3318878
Year 4	3236711	4597434	14624630	0.7921	2563778
TOTAL			14624630		12684904

The Net Present Value at 6% discount rate is 2657708

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. 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 Aydin Yemeksepeti 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. Aydin Yemeksepeti 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 Yemeksepeti: Growing and Expanding the Business Model through Data

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 Aydin Yemeksepeti 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 Aydin Yemeksepeti 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	(10027196)	-10027196	-	-
Year 1	3465393	-6561803	3465393	0.8696	3013385
Year 2	3969689	-2592114	7435082	0.7561	3001655
Year 3	3952837	1360723	11387919	0.6575	2599054
Year 4	3236711	4597434	14624630	0.5718	1850600
TOTAL					10464695

The Net NPV after 4 years is 437499

(10464695 - 10027196 )

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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	(10027196)	-10027196	-	-
Year 1	3465393	-6561803	3465393	0.8333	2887828
Year 2	3969689	-2592114	7435082	0.6944	2756728
Year 3	3952837	1360723	11387919	0.5787	2287521
Year 4	3236711	4597434	14624630	0.4823	1560914
TOTAL					9492991

The Net NPV after 4 years is -534205

At 20% discount rate the NPV is negative (9492991 - 10027196 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Aydin Yemeksepeti 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 Aydin Yemeksepeti has a NPV value higher than Zero then finance managers at Aydin Yemeksepeti 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 Aydin Yemeksepeti, then the stock price of the Aydin Yemeksepeti 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 Aydin Yemeksepeti 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 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 uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

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 Yemeksepeti: Growing and Expanding the Business Model through Data

References & Further Readings

William R. Kerr, Gamze Yucaoglu, Eren Kuzucu (2018), "Yemeksepeti: Growing and Expanding the Business Model through Data Harvard Business Review Case Study. Published by HBR Publications.