The Refresher: Net Present Value

Harvard Business Review

Next time you’re deciding about a big investment, NPV can help you make a more informed decision. Finance & Accounting Video

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A Refresher on Net Present Value

Harvard Business Review

Finance

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A Refresher on Net Present Value

Harvard Business Review

Finance

10 Reasons Why Every Manager Should take a Finance Course

Great Leadership By Dan

Caution: when employees feel like owners, no more wasting money on expensive furniture, management boondoggles, or projects with a poor net present value. We just finished a “ Finance and Accounting for the Non-Financial Manager ” program this week for a large client. The audience was mostly engineers – program and project managers, the ones in charge of designing and making complex stuff. It was 3.5

A Refresher on Payback Method

Harvard Business Review

There are a variety of ways to calculate a return on investment (ROI) — net present value , internal rate of return , breakeven — but the simplest is payback period. A Refresher on Net Present Value.

How Marketers Can Avoid Big Data Blind Spots

Harvard Business Review

That’s because marketing has a big opportunity to drive above-market growth and demonstrate its value to the C-suite and the boardroom. That kind of value can turn plenty of heads in the C-suite. Without ongoing investment in the brand, the value of this base erodes over time and creates a stiff head wind for future sales. These estimates can then help determine the Net Present Value (NPV) of the long term effect of marketing in terms of future sales.

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When It Pays to Think Like a Finance Manager

Harvard Business Review

Do you think they’re going to do a net present value (NPV) analysis that shows they don’t need that computer?

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4 Assumptions About Risk You Shouldn’t Be Making

Harvard Business Review

Most readers assume Frost’s poem is hopeful, describing the value of the rugged individualism that has long served as an American hallmark. The general rule is projects with positive net present values should get funded, and those with negative ones shouldn’t.

A Refresher on Price Elasticity

Harvard Business Review

“The higher the absolute value of the number, the more sensitive customers are to price changes,” explains Avery. “Our job is to create products and services that have unique and sustainable value for customers compared with other options available to them in the marketplace.

What If Investors Who Held Their Shares Longer Got More Voting Power?

Harvard Business Review

” Laying out their data, they find that long-term oriented companies create more financial value and more jobs. The Refresher: Net Present Value. The fundamental difference in value to the company notwithstanding, those equity dollars invested are given exactly the same rights. Joe Bower and Lynn Paine “had me at hello” (to quote Jerry Maguire ) with their new HBR article, “ The Error at the Heart of Corporate Leadership.”

How to Improve Your Finance Skills (Even If You Hate Numbers)

Harvard Business Review

But having a grasp of terms like EBITDA and net present value are important no matter where you sit on the org chart. The Refresher: Net Present Value. “Think of yourself as a miniature profit and loss statement: How do you add value?” “Suddenly I needed to know things like EBITDA and how enterprise value was determined,” he says. If you’re not a numbers person, finance is daunting.

The Most Common Reasons Customer Experience Programs Fail

Harvard Business Review

Often, these results are accepted at face value. But the problem with this approach is you really can’t control for all other things that could cause scores to rise, and you can’t assume that a rise in scores is good for net revenue. Customer Lifetime Value : This is the net present value of all future customer revenues with account for attrition and your discount rate. Let them demonstrate value to earn more resources.

Why Is an App Worth as Much as a Small Oil Field?

Harvard Business Review

While on the surface, the dirty business of fossil fuels is nothing like Silicon Valley, many in the oil business have moved beyond the standard net present value (NPV) model for assessing the merit of investments. If you’re evaluating the rights to new shale oil reserves in a place like North Dakota, today you’d rely instead on a different economic model: option value. But Facebook has also bought itself time to figure out how to extract value from that audience.

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An Unexpected Lesson from Mandela: Why Context Matters

Harvard Business Review

I made what I thought was a brilliant presentation to senior bureaucrats and technologists. These were engineers and network planners; surely, they understood economics and net present value analysis. Yes, I was there at a true inflection point, armed with the finest analysis possible, elaborate layers of spreadsheets, and well-crafted presentations.

How CMOs Can Get CFOs on Their Side

Harvard Business Review

CFOs are more interested in capital investment estimates, net present values, and a clear outline of the trade-offs of any investment. Creating transparency into its operations is the starting point for marketing to help CFOs understand where and how value is being gained or lost, which makes budgeting discussions much more productive. As a long-term asset of significant value, the brand should be part of those calculations.

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Stop Focusing on Profitability and Go for Growth

Harvard Business Review

Today, the average cost of equity capital sits at close to half that: just 8% for the roughly 1600 companies comprising the Value Line Index. The ready access to low-cost capital should change the way business leaders think about strategy, and in particular the relative value of improving profit margins versus accelerating growth. But when capital costs are low, the time value of money is low. The Refresher: Net Present Value.

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What Private Equity Investors Think They Do for the Companies They Buy

Harvard Business Review

” PE firms typically take three types of value increasing actions — financial engineering, governance engineering, and operational engineering. In particular, no paper examines detailed levers of value creation across financial, governance, and operational engineering.

The Big Trends Changing Community Development

Harvard Business Review

From the private sector, the trend is toward recognizing the business value of community progress. What began as charity-minded Corporate Social Responsibility (CSR) programs have evolved into pursuits of “shared value.” And when companies collaborate, even further value can be created – a point I discussed in a previous post. Big trends in business and society tend to march along at a measured pace.

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An HBR Refresher on Breakeven Quantity

Harvard Business Review

“It’s one of the more popular ways that managers calculate marketing ROI,” says Avery, pointing out that other common ones include calculating the investment payback period, calculating an internal rate of return, and using net present value analysis.

How to Choose the Ideas Your Company Should Invest In

Harvard Business Review

Note what isn't part of the decision: an idea's net present value or return on investment. My last post described how Innosight follows a three-stage process to evaluate investment proposals from outside entrepreneurs. But deciding how to invest in ideas at a corporation is a different beast. In The Innovator's Guide to Growth we suggested that companies should create one-page "Idea Resumes" that capture the essence of an idea on a single PowerPoint slide.

Only the CEO Can Make the Big Bets

Harvard Business Review

In the late 1990s, we presented the Gretzky metaphor to a division of a large, global bank. And using net-present-value estimates for "beginning" ideas is nuts. This blog was written with Jay Terwilliger and Mark Sebell, managing partners at Creative Realities , a Boston-based innovation management collaborative. You have probably heard the Wayne Gretzky quote about skating to where the puck will be a hundred times at least.

What Xerox PARC Learned About Executing on Open Innovation

Harvard Business Review

However, we learned the difficult lesson that unless we could clearly articulate the maturity level and value proposition for a new technology within the context of our partners' other choices, there was little or no value in the technology — regardless of how much money we had invested in it. It's hard to value an idea without understanding just how much time and money it will take to implement it. Net Present Value ).

Shape Strategy With Simple Rules, Not Complex Frameworks

Harvard Business Review

To prioritize projects, for instance, the ALL team could have forecast future cash flows for every potential investment and ranked all proposals on the basis of their net present value. Successful companies shape their high-level strategies by relying not on complicated frameworks but on simple rules of thumb.

Is Your Business Biased Against Innovation?

Strategy Driven

Many conventional metrics we use to estimate value are based on faulty assumptions. Net present value [NPV] is a case in point. For instance, intelligent failures can add more value than predictable successes, and low-cost experimentation trumps analysis. Tools for each challenge are presented, backed by examples from companies – from small firms to global giants – that have successfully put these methods into practice.

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Why You Should Crowd-Source Your Toughest Investment Decisions

Harvard Business Review

Most companies – including the movie studios in Hollywood – over-rely on basic tools like discounted cash flow and net present value. How P&G Presents Data to Decision Makers. Only three or four out of every ten movies made in America breaks even or earns a profit.

Match Your Innovation Process to the Results You Want

Harvard Business Review

When forced to present familiar metrics for truly out-of-the-box "beginning" ideas, work teams develop what our friend Jay Paap calls "Imaginary Numbers." We have a biotech client whose executive leadership team, starting with the CEO, demanded net present value estimates for fledgling, "beginning" ideas.and they wondered why they weren't launching any game-changing innovations. They must also be willing to see value in absurdity.

Debt and the Future of the U.S.

Harvard Business Review

Consider, for example, that the estimated net present value of obligations under the Social Security system is approximately $8 trillion. Even more problematic is that the Medicare system has a vested unfunded net liability of approximately $38 trillion. The total value of explicit loan guarantees is well over $10 trillion. the change in the Medicare liability) plus the implicit net cost of the annual guarantee for various liabilities.

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The Secrets to Building a Lucky Network

Harvard Business Review

After all, if he were on a desert island without a capital market, the value of his skill goes nearly to zero. The net present value and strategic fit of a given relationship or initial introduction in one's Lucky Network might be foggy at best, but unintended benefits often manifest for those who embrace relationships with openness. There are no guarantees to entrepreneurial success.

Still Many Ways to Skin a Capital Cost

Harvard Business Review

To make sure they're comparing apples to apples, they discount those future cash flows to arrive at their net present value. Estimating the rate at which to discount the cash flows — the cost of equity capital — is an integral part of the exercise, and the choice of rate has a significant effect on estimates of a project's or a company's value.

Warren Buffett's 2010 Shareholder Letter: What to Expect

Harvard Business Review

Establish "an unbending standard of performance" : Since 1965, Buffett has annually compared Berkshire's compounded growth in book value per share to the growth in the S&P 500 (plus dividends). But why compare apples (book value) to oranges (share price and dividends)? Buffett explains that book value is the best proxy for "intrinsic value," the net present value of all estimated future cash flows. billion more than their total tangible book value.

Will You Be Writing Off Your Investment in Egypt?

Harvard Business Review

Anyone who has had to make the argument for an investment knows the basic tool involved: a Net Present Value (NPV) calculation. The overall value of a foreign investment is equal to the NPV of the expected stream of profits for the life of the investment.

Rethinking Valuation So You Don't Miss a Good Deal

Harvard Business Review

The other is a process called Opportunity Engineering (OE) that instills a different way to look at value. To define the full value of acquisitions analyze the target's assets and assign them across the Three Horizons of the acquirer to understand how they add value. Since the Three Horizons represent different levels of uncertainty, they need to be managed and valued differently. We call this the Opportunity Value (OV) of an asset.