Had a case where your client is the owner of a large zoo and he has an opportunity to participate in an auction for 2 dinosaur eggs. It's a one time auction so you can only make one bid. You have to recommend how much he bids for these eggs.

Question

The objective is to be financially viable. They want to increase the number of people who come to the zoo. The special thing about the eggs is that they're expected to be hatched soon.

The Zoo has a capacity of 50000 people, 30% capacity utilization. Ticket prices are 10$. It's open 300 days with a 40% net margin. After getting the eggs it would be 80% capacity utilization, 23$ ticket but our per year costs would be 5M$ and upfront costs capex 10M$. Calculate the bid

For this, I said that it should be either the entire profit increase or a percentage of it taking into account any risks. (Profit after eggs - Profit before eggs)
Is there something I missed?

Answer 1

Hi there,

I would be happy to share my thoughts on your question:

First of all, and contrary to what other coaches have said, I would assume you don’t actually have to calculate an NPV, but understand where the break-even point would be, which is a computation more realistic in a case study.
Moreover, you would nonetheless need to understand what the financial metric the client is considering first.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

Answer 2

Hi

Did you get a sense you missed something after you articulated your logic? This sounds like a NPV problem as you are effectively buying a cash generating asset (the eggs) - i.e. what is the NPV of incremental profit the dinosaurs generate over a defined period of time (assuming there is a life span for the dinosaurs). CAPEX is included as a cash outflow.

Peter