Palantir Philanthropy Engineering: Software to Improve Lives 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 Palantir Philanthropy Engineering: Software to Improve Lives case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Palantir Philanthropy Engineering: Software to Improve Lives case study is a Harvard Business School (HBR) case study written by Laura Arrillaga-Andreessen, Sarah Murray. The Palantir Philanthropy Engineering: Software to Improve Lives (referred as “Palantir Software” 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, Joint ventures.

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 Palantir Philanthropy Engineering: Software to Improve Lives Case Study

By 2014, Palantir Technologies, a fast growing Silicon Valley company with global impact at the heart of its mission, had spent several years donating the same software to nonprofits that it sold to commercial customers to help solve some of the world's most pressing problems. It had consolidated these philanthropic activities in 2011, when Jason Payne, a long-time software engineer at the company, made an internal transition to found the company's Philanthropy Engineering Program. Palantir developed software that pulled diverse and extensive data into a unified platform, allowing customers to generate new insights by analyzing and exploring their data. The company's software could be used across a wide range of sectors. It helped organizations detect fraud, defend against cyber attacks, drive operational planning and strategic decision-making, track disease outbreaks, improve standards of care, and respond to crime. Palantir had recognized early on that its suite of applications were also extremely valuable to social sector organizations-those with the potential to make significant global impact, but that lacked the resources to purchase Palantir's technology. The company therefore decided not only to make its software and engineering support freely available to these organizations, but also to engage closely with them to support their work. It was an approach to corporate philanthropy that differed significantly from the traditional model.

Case Authors : Laura Arrillaga-Andreessen, Sarah Murray

Topic : Leadership & Managing People

Related Areas : Joint ventures

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Calculating Net Present Value (NPV) at 6% for Palantir Philanthropy Engineering: Software to Improve Lives Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10017650)	-10017650	-	-
Year 1	3462855	-6554795	3462855	0.9434	3266844
Year 2	3963394	-2591401	7426249	0.89	3527407
Year 3	3966383	1374982	11392632	0.8396	3330252
Year 4	3233133	4608115	14625765	0.7921	2560944
TOTAL			14625765		12685447

The Net Present Value at 6% discount rate is 2667797

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. Payback Period
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. Timing of the expected cash flows – stockholders of Palantir Software 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. Palantir Software 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 Palantir Philanthropy Engineering: Software to Improve Lives

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 Palantir Software 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 Palantir Software 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	(10017650)	-10017650	-	-
Year 1	3462855	-6554795	3462855	0.8696	3011178
Year 2	3963394	-2591401	7426249	0.7561	2996895
Year 3	3966383	1374982	11392632	0.6575	2607961
Year 4	3233133	4608115	14625765	0.5718	1848554
TOTAL					10464589

The Net NPV after 4 years is 446939

(10464589 - 10017650 )

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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	(10017650)	-10017650	-	-
Year 1	3462855	-6554795	3462855	0.8333	2885713
Year 2	3963394	-2591401	7426249	0.6944	2752357
Year 3	3966383	1374982	11392632	0.5787	2295361
Year 4	3233133	4608115	14625765	0.4823	1559188
TOTAL					9492618

The Net NPV after 4 years is -525032

At 20% discount rate the NPV is negative (9492618 - 10017650 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Palantir Software 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 Palantir Software has a NPV value higher than Zero then finance managers at Palantir Software 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 Palantir Software, then the stock price of the Palantir Software 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 Palantir Software 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 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.

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.

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Negotiation Strategy of Palantir Philanthropy Engineering: Software to Improve Lives

References & Further Readings

Laura Arrillaga-Andreessen, Sarah Murray (2018), "Palantir Philanthropy Engineering: Software to Improve Lives Harvard Business Review Case Study. Published by HBR Publications.