NPV Calculation

Question

Hi,

For the final NPV calculation, could you explain where the 11.25M and 1.88M figures come from? Thanks!

Total recurring profits = High season profits + Low season profits = 180 * x * 125 * ( $600 - $100) + 180 * 60% * 125 * ( $400 - $100) - $2.17M = $11.25M * x + $1.88M

Answer 1

A few key tips:

You should use NPV when:

They say we should calculate out into perpituity (i.e. forever)
They provide you with a discount rate, cost of equity/capital, etc.
There is a set growth rate (into perpituity)
They want a calculation into the next year or two
As a default (i.e. always say "I could do NPV if needeD"

You should not use NPV when:

You have offered and they say no
For any calculations that are >= 3 years or < inifinity

The reason? They don't expect you to do the crazy math that NPV requires further than to the power of 2/3.

In this case, the answer is provided here: "Total recurring profits = High season profits + Low season profits = 180 * x * 125 * ( $600 - $100) + 180 * 60% * 125 * ( $400 - $100) - $2.17M "

Answer 2

Hi,
thanks for your question. Happy to make it clearer.

If x is our high season occupancy we have that:

high season contribution margin (fixed costs excluded) = high season revenues - high season variable costs = 180 * x * 125 * ( $600 - $100) = $11.25M * x
low season contribution margin = 180 * 60% * 125 * ( $400 - $100) = $4.05M
yearly fixed costs = $2.17M

Therefore we have:
Total recurring profits = $11.25M * x + $4.05M - $2.17M = $11.25M * x + $1.88M

Does it make more sense?

Best,
Antonello

Answer 3

Hello!

This is a great example of the use of contribution margins, that is totally key when calculating NPVs.

Cheers,

Clara