Aswath Damodaran – Session 15 (MBA): Netflix (NFLX) Case and Closing the Books on Investment Analysis

The bulk of today’s class was spent on the Netflix Studio case. While the case itself will soon be forgotten (as it should), I hope that some of the issues that we talked about today stay fresh. I have put the presentation and excel spreadsheet with my numbers online:
Presentation: http://www.stern.nyu.edu/~adamodar/pd…
Excel spreadsheet with analysis: http://www.stern.nyu.edu/~adamodar/pd…
Please download them.

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In the last part of the class, we tied up some loose ends relating to investment analysis, starting with valuing side benefits and synergies and then taking a big picture perspective of the options that are often embedded in project analysis that may lead us to take negative NPV investments.
Slides:
http://www.stern.nyu.edu/~adamodar/po...
Post class test: http://www.stern.nyu.edu/~adamodar/pd...
Post class test solution: http://www.stern.nyu.edu/~adamodar/pd...

The cost of capital for the cash flows from the studio, reflecting its risk (content production) and its focus (international) is 10.56%. The cost of capital for cost savings in the US, reflecting its risk and focus is 10.09%.

¨ This project is a good project even without the side benefits of cost savings and becomes even better if you include those benefits. ¤

The average return on capital, in the finite life case, is 27.94%, without counting synergy, and is 30.67%, with the cost savings counted in. ¤

The net present value of the cash flows the studio, using the 10.56% cost of capital n Is $386.22 million, under the finite life assumption of a of 10 years.

Adding the present value of cost savings adds $123.42 million to that NPV yielding a total NPV of $509.64 million n Is $1888.19 million, under the assumption of an infinite life.

Adding the present value of cost savings adds $228.01 million to that NPV to yield a total NPV of $2,116.20 billion

 The IRR exceeds the cost of capital in both cases. ¨ I would accept the studio investment. Not only does it generate added value on a stand alone basis, but Netflix could use the added subscriber base to find ways to augment value in the future.