Calculation for NPV / VAN

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

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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