Go Beyond Investing 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 Go Beyond Investing case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Go Beyond Investing case study is a Harvard Business School (HBR) case study written by Lynda M. Applegate, Vincent Dessain, Emilie Billaud, Daniela Beyersdorfer. The Go Beyond Investing (referred as “Baumann Investing” 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 management, Leadership, Organizational culture.

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 Go Beyond Investing Case Study

In 2013, Brigitte Baumann, founder of the Pan-European angel investing provider Go Beyond Investing, reflected on the evolution of her venture and the way forward. Her company, which offered deal flow and training to novice and experienced angel investors and ran investor groups in several European countries, had reached a critical size, and Baumann needed to make a strategic decision to ensure its future growth in an industry that was undergoing rapid competitive and regulatory change. Her options required a decision on whether to keep her venture independent, and use a financing round to grow and scale it to a European leader in early stage investing, or whether to cash out and/or have it evolve more quickly through a partnership or sale. Possibilities included a future sale to a private bank that was looking for ways to expand their investment offerings for high net worth individuals, or joining forces with one of the emerging crowdfunding networks that targeted small investors. All of these options would require adjustments to Go Beyond Investing's strategy, capabilities, financing, and organizational structure.

Case Authors : Lynda M. Applegate, Vincent Dessain, Emilie Billaud, Daniela Beyersdorfer

Topic : Innovation & Entrepreneurship

Related Areas : Financial management, Leadership, Organizational culture

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Calculating Net Present Value (NPV) at 6% for Go Beyond Investing Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10001587)	-10001587	-	-
Year 1	3460402	-6541185	3460402	0.9434	3264530
Year 2	3978682	-2562503	7439084	0.89	3541013
Year 3	3972928	1410425	11412012	0.8396	3335747
Year 4	3232443	4642868	14644455	0.7921	2560398
TOTAL			14644455		12701688

The Net Present Value at 6% discount rate is 2700101

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. Profitability Index
2. Net Present Value
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 Baumann Investing 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. Baumann Investing 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 Go Beyond Investing

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 Baumann Investing 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 Baumann Investing 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	(10001587)	-10001587	-	-
Year 1	3460402	-6541185	3460402	0.8696	3009045
Year 2	3978682	-2562503	7439084	0.7561	3008455
Year 3	3972928	1410425	11412012	0.6575	2612265
Year 4	3232443	4642868	14644455	0.5718	1848160
TOTAL					10477925

The Net NPV after 4 years is 476338

(10477925 - 10001587 )

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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	(10001587)	-10001587	-	-
Year 1	3460402	-6541185	3460402	0.8333	2883668
Year 2	3978682	-2562503	7439084	0.6944	2762974
Year 3	3972928	1410425	11412012	0.5787	2299148
Year 4	3232443	4642868	14644455	0.4823	1558856
TOTAL					9504646

The Net NPV after 4 years is -496941

At 20% discount rate the NPV is negative (9504646 - 10001587 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Baumann Investing 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 Baumann Investing has a NPV value higher than Zero then finance managers at Baumann Investing 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 Baumann Investing, then the stock price of the Baumann Investing 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 Baumann Investing 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 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 will be a multi year spillover effect of various taxation regulations.

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 Go Beyond Investing

References & Further Readings

Lynda M. Applegate, Vincent Dessain, Emilie Billaud, Daniela Beyersdorfer (2018), "Go Beyond Investing Harvard Business Review Case Study. Published by HBR Publications.