How much are you willing to pay for a taxi-license in NY.

Question

Hi all,

I was wondering if you can help me break down “How much are you willing to pay for a traditional taxi-license in NY”.

Considering there is enough demand, uber etc. are not counted for and 1 license = 1 car licensed to operate. (one time license).

Our client is looking into bidding for one license at the moment only.

Is it fair to assume that profits will be taken into account in order to try and estimate the bidding price for the license? trying to take cost into account as well? is that a sound approach?

Answer 1

This question has been doing the rounds in MBB interviews a lot lately.

One approach to this would involve the following steps:

Estimate typical revenue for a cab driver in NYC by taking assumptions on # of rides, ride length (avg. fare), working hours etc. (Keep in mind that taxi drivers spend a fair amount of idle time at the taxi ranks)
Estimate typical costs for a cab driver including fuel, repairs, food, personal living expenses, car mortgage etc.
The difference in above two would be the net cash flow
The theoretical price for the taxi medallion should be the PV of all future cash flows
You can assume a relevant discount rate for US/NYC and also assume some relevant inflation

Give it a go - take some assumptions - feel free to DM and discuss your full solution.

I have known people who have arrived at relatively close estimates to the actual known auction prices.

Answer 2

Hi there,

You're absolutely right! Ultimately, you need to figure out your expected revenues into perpituity (NPV), by figuring out # rides per year, x $ per ride, etc.

Then, you need to figure out what purchase price gets you an ROI (or really, an annual salary) that's reasonable for your efforts!

Remember, here “cost” is also opportunity cost in the sense that this is not an investment, but rather a income. Therefore, you don't need a 5% return like other investments, but likely a far greater one that meets your salary needs!

Answer 3

I would estimate the expected daily/yearly cashflow (profit) from the cab and then discount it to perpetuity using a reasonable discount rate to arrive at the value for how much to bid for it.