TabletTeach: Opportunity Analysis for a New Educational Technology Product 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 TabletTeach: Opportunity Analysis for a New Educational Technology Product case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. TabletTeach: Opportunity Analysis for a New Educational Technology Product case study is a Harvard Business School (HBR) case study written by Mohanbir Sawhney, John Miniati. The TabletTeach: Opportunity Analysis for a New Educational Technology Product (referred as “Russo Tabletteach” 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, Product development.

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 TabletTeach: Opportunity Analysis for a New Educational Technology Product Case Study

In May 2013, Jack Russo, a Chicago-based tech entrepreneur, had to choose one of four possible product concepts to use as the starting point for his new K-8 educational learning company, TabletTeach LLC. At the time, the K-12 education market in the United States was experiencing major disruption due to print-to-digital transformation, new Common Core State Standards (CCSS), new standardized tests aligned to the Common Core (rolling out in most states in the 2014-2015 school year), and increasing pressure from parents for schools to incorporate technology in their children's learning. Based on his first-hand experience and research, Russo knew there was a significant opportunity for a company that brought to market a tablet-enabled learning solution focusing on grades K-8, which made learning Common Core math and/or language arts fun for every student and engagingly simple for all teachers. This case provides an interesting example of something typically hard to teach: transitioning from the fuzzy front end of a market opportunity analysis to a specific product opportunity. The case bounds the problem by outlining four potential product concepts, which students will then evaluate and rank using their own sets of criteria.

Case Authors : Mohanbir Sawhney, John Miniati

Topic : Innovation & Entrepreneurship

Related Areas : Entrepreneurship, Product development

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Calculating Net Present Value (NPV) at 6% for TabletTeach: Opportunity Analysis for a New Educational Technology Product Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10009555)	-10009555	-	-
Year 1	3455877	-6553678	3455877	0.9434	3260261
Year 2	3956944	-2596734	7412821	0.89	3521666
Year 3	3959889	1363155	11372710	0.8396	3324799
Year 4	3223170	4586325	14595880	0.7921	2553053
TOTAL			14595880		12659779

The Net Present Value at 6% discount rate is 2650224

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. Internal Rate of Return
4. Net Present Value

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 Russo Tabletteach 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. Russo Tabletteach 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 TabletTeach: Opportunity Analysis for a New Educational Technology Product

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 Russo Tabletteach 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 Russo Tabletteach 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	(10009555)	-10009555	-	-
Year 1	3455877	-6553678	3455877	0.8696	3005110
Year 2	3956944	-2596734	7412821	0.7561	2992018
Year 3	3959889	1363155	11372710	0.6575	2603691
Year 4	3223170	4586325	14595880	0.5718	1842858
TOTAL					10443678

The Net NPV after 4 years is 434123

(10443678 - 10009555 )

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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	(10009555)	-10009555	-	-
Year 1	3455877	-6553678	3455877	0.8333	2879898
Year 2	3956944	-2596734	7412821	0.6944	2747878
Year 3	3959889	1363155	11372710	0.5787	2291602
Year 4	3223170	4586325	14595880	0.4823	1554384
TOTAL					9473761

The Net NPV after 4 years is -535794

At 20% discount rate the NPV is negative (9473761 - 10009555 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Russo Tabletteach 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 Russo Tabletteach has a NPV value higher than Zero then finance managers at Russo Tabletteach 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 Russo Tabletteach, then the stock price of the Russo Tabletteach 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 Russo Tabletteach 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 key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Understanding of risks involved in the project.

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.

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 TabletTeach: Opportunity Analysis for a New Educational Technology Product

References & Further Readings

Mohanbir Sawhney, John Miniati (2018), "TabletTeach: Opportunity Analysis for a New Educational Technology Product Harvard Business Review Case Study. Published by HBR Publications.