Weiner Staatsoper (A): Streaming from the Vienna Opera House 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 Weiner Staatsoper (A): Streaming from the Vienna Opera House case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Weiner Staatsoper (A): Streaming from the Vienna Opera House case study is a Harvard Business School (HBR) case study written by Dagmar Abfalter, Sebastien Boutonnet, Serge Poisson-de-Haro. The Weiner Staatsoper (A): Streaming from the Vienna Opera House (referred as “Staatsoper Opera” 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, Decision making, Technology.

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 Weiner Staatsoper (A): Streaming from the Vienna Opera House Case Study

This case series focuses on the challenges faced by prestigious arts organizations when confronted with new cultural arts consumption modes, especially those created by the explosion of digital consumption opportunities. In 2012/13, the Wiener Staatsoper (the Vienna State Opera) enjoyed a 99 per cent occupancy rate but, apart from the national broadcasting network, lacked a presence in the digital arena. In contrast, performances by New York's Metropolitan Opera could be viewed in movie theatres around the world. The Staatsoper also faced financial challenges shared by opera houses around the world. Should the Staatsoper enter the digital arena? If so, what adaptations would be required in its business model? Dagmar Abfalter is affiliated with UniversitA?t fA?r Musik und darstellende Kunst Wien. Sebasien Boutonnet is affiliated with HEC Montreal. Serge Poisson-de Haro is affiliated with HEC Montreal.

Case Authors : Dagmar Abfalter, Sebastien Boutonnet, Serge Poisson-de-Haro

Topic : Leadership & Managing People

Related Areas : Decision making, Technology

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Calculating Net Present Value (NPV) at 6% for Weiner Staatsoper (A): Streaming from the Vienna Opera House Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10029986)	-10029986	-	-
Year 1	3447417	-6582569	3447417	0.9434	3252280
Year 2	3957914	-2624655	7405331	0.89	3522529
Year 3	3938970	1314315	11344301	0.8396	3307235
Year 4	3239528	4553843	14583829	0.7921	2566010
TOTAL			14583829		12648054

The Net Present Value at 6% discount rate is 2618068

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. Internal Rate of Return
2. Profitability Index
3. Payback Period
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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Staatsoper Opera 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 Staatsoper Opera have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Weiner Staatsoper (A): Streaming from the Vienna Opera House

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 Staatsoper Opera 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 Staatsoper Opera 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	(10029986)	-10029986	-	-
Year 1	3447417	-6582569	3447417	0.8696	2997754
Year 2	3957914	-2624655	7405331	0.7561	2992752
Year 3	3938970	1314315	11344301	0.6575	2589937
Year 4	3239528	4553843	14583829	0.5718	1852211
TOTAL					10432653

The Net NPV after 4 years is 402667

(10432653 - 10029986 )

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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	(10029986)	-10029986	-	-
Year 1	3447417	-6582569	3447417	0.8333	2872848
Year 2	3957914	-2624655	7405331	0.6944	2748551
Year 3	3938970	1314315	11344301	0.5787	2279497
Year 4	3239528	4553843	14583829	0.4823	1562272
TOTAL					9463168

The Net NPV after 4 years is -566818

At 20% discount rate the NPV is negative (9463168 - 10029986 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Staatsoper Opera 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 Staatsoper Opera has a NPV value higher than Zero then finance managers at Staatsoper Opera 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 Staatsoper Opera, then the stock price of the Staatsoper Opera 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 Staatsoper Opera 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.

Understanding of risks involved in 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.

What will be a multi year spillover effect of various taxation regulations.

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.

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Negotiation Strategy of Weiner Staatsoper (A): Streaming from the Vienna Opera House

References & Further Readings

Dagmar Abfalter, Sebastien Boutonnet, Serge Poisson-de-Haro (2018), "Weiner Staatsoper (A): Streaming from the Vienna Opera House Harvard Business Review Case Study. Published by HBR Publications.