×




Walt Disney and the 1941 Animator's Strike 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 Walt Disney and the 1941 Animator's Strike case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Walt Disney and the 1941 Animator's Strike case study is a Harvard Business School (HBR) case study written by Nitin Nohria, Anthony J. Mayo, Bridget Gurtler. The Walt Disney and the 1941 Animator's Strike (referred as “Animator's 1941” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Creativity, Disruptive innovation, Entrepreneurship, Human resource management, Intellectual property, Labor, Leadership.

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 Walt Disney and the 1941 Animator's Strike Case Study


Focuses on the leadership lessons drawn from the events precipitating the Animator's Strike of 1941, depicting the growing pains of a company that was as much formed and changed by American culture as American culture was formed and changed by it. The tale of Walt Disney's roller-coaster journey from small-town paperboy to underage ambulance-driving serviceman to amateur animator and thrice-failed businessman to iconic leader is told against the backdrop of swift and seeping change in the beginning of the 20th century. An ambitious creative genius, he masterfully pursued emerging technological advantage and uniquely grasped and personified American social mores, but was reckless and naive about strategic business issues, especially concerning intellectual property and human resources management. A rewritten version of an earlier case. A rewritten version of an earlier case.


Case Authors : Nitin Nohria, Anthony J. Mayo, Bridget Gurtler

Topic : Leadership & Managing People

Related Areas : Creativity, Disruptive innovation, Entrepreneurship, Human resource management, Intellectual property, Labor, Leadership




Calculating Net Present Value (NPV) at 6% for Walt Disney and the 1941 Animator's Strike Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10005430) -10005430 - -
Year 1 3470565 -6534865 3470565 0.9434 3274118
Year 2 3959210 -2575655 7429775 0.89 3523683
Year 3 3957188 1381533 11386963 0.8396 3322531
Year 4 3247064 4628597 14634027 0.7921 2571979
TOTAL 14634027 12692311




The Net Present Value at 6% discount rate is 2686881

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. 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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Animator's 1941 shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Animator's 1941 have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Walt Disney and the 1941 Animator's Strike

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 Leadership & Managing People 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 Animator's 1941 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 Animator's 1941 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 (10005430) -10005430 - -
Year 1 3470565 -6534865 3470565 0.8696 3017883
Year 2 3959210 -2575655 7429775 0.7561 2993732
Year 3 3957188 1381533 11386963 0.6575 2601915
Year 4 3247064 4628597 14634027 0.5718 1856519
TOTAL 10470049


The Net NPV after 4 years is 464619

(10470049 - 10005430 )








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 (10005430) -10005430 - -
Year 1 3470565 -6534865 3470565 0.8333 2892138
Year 2 3959210 -2575655 7429775 0.6944 2749451
Year 3 3957188 1381533 11386963 0.5787 2290039
Year 4 3247064 4628597 14634027 0.4823 1565907
TOTAL 9497535


The Net NPV after 4 years is -507895

At 20% discount rate the NPV is negative (9497535 - 10005430 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Animator's 1941 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 Animator's 1941 has a NPV value higher than Zero then finance managers at Animator's 1941 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 Animator's 1941, then the stock price of the Animator's 1941 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 Animator's 1941 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.

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.

Understanding of risks involved in 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 Walt Disney and the 1941 Animator's Strike

References & Further Readings

Nitin Nohria, Anthony J. Mayo, Bridget Gurtler (2018), "Walt Disney and the 1941 Animator's Strike Harvard Business Review Case Study. Published by HBR Publications.


Kyowa Hakko Kirin SWOT Analysis / TOWS Matrix

Healthcare , Biotechnology & Drugs


Impact Healthcare REIT SWOT Analysis / TOWS Matrix

Financial , Misc. Financial Services


Cliq Digital SWOT Analysis / TOWS Matrix

Technology , Software & Programming


Nichicon Corp SWOT Analysis / TOWS Matrix

Technology , Electronic Instr. & Controls


Amazon.com SWOT Analysis / TOWS Matrix

Services , Retail (Catalog & Mail Order)


GFA SWOT Analysis / TOWS Matrix

Financial , Investment Services


Gesco AG SWOT Analysis / TOWS Matrix

Basic Materials , Misc. Fabricated Products


Grupo Simec ADR SWOT Analysis / TOWS Matrix

Basic Materials , Iron & Steel


GoldMining SWOT Analysis / TOWS Matrix

Basic Materials , Gold & Silver