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Calculation for NPV / VAN

NPV
Anonymous A asked on Aug 22, 2019 - 1 answer

Hello,

could someone tell me, how they come up with the NPV/ VAN calculation here and there required price?

http://www.archeryconsulting.fr/files/etude-cas-archery_FR.pdF

thanks.

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Francesco
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updated his answer on Aug 24, 2019
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Hi Anonymous,

the link you posted seems not working, could you please post the full question? We can then provide an answer to it.

Best,

Francesco

---

EDIT

The new link works, thanks.

The solution is quite bad explained indeed.

For the NPV in the first case, you get -50M as follows:

Data:

  • Investment: 300M
  • Quantity: 500k
  • Price: 1850
  • Cost: 1800
  • Discount rate: 10%

Thus profit margin is 50. Multiplied times 500k you get 25M. Using the perpetuity formula with 10% discount rate, you get 250M in the lifetime of operations (25M/10%).

Thus the net result is -300M+250M = -50M

For the minimum price, you get 2025 as follows.

Data:

  • Investment: 300M
  • Old quantity: 300k
  • Old price: 2300
  • Old cost: 2000
  • New quantity: 500k
  • New price: x
  • New cost: 1800
  • Discount rate: 10%

For some reasons not clearly explained, the case assumes that you will produce the 300k at the old cost, plus the additional 500k at the new cost. Thus:

New profits – Investment = Old profits

((x-2000)*300k)/10% +((x-1800)*500k)/10%-300M=((2300-2000)*300k)/10%

Where x is the minimum price. Solving the equation you get

x*3M-6B+x*5M-9B-300M=900M

x=16.2B/8M=2025

Hope this helps,
Francesco

(edited)

It should actually work, this is the case example on archery http://www.archeryconsulting.fr/files/etude-cas-archery_FR.pdf Thanks! — Anonymous on Aug 22, 2019 (edited)

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