Mini Case: Calculate your own NPV

minicase NPV
New answer on Mar 27, 2020
4 Answers
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Anonymous A asked on Mar 26, 2020

Hi everyone,

how would you approach and solve this mini case to calculate your own NPV?

I would try to figure out the average sallary per year and do a perpetuity calculation with a percentage such as 5%. Otherwise this would be very hard to calculate.

Things to think about would be whether to take net or gross income and wether to include pensions after retirements.

Best

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Francesco
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replied on Mar 27, 2020
#1 Expert for Coaching Sessions (3.700+) | 1.300+ Reviews with 100% Recommendation Rate | Ex BCG | 8+ Years of Coaching

Hi there,

I reported my comments below:

  • you can use a DCF model as for several years it approximates well the real flow of money (which would end somewhere between age 80 and 110).
  • the discount rate represents the rate of return (therefore correlated with the expected risk) related to the cash flow of the “project” (in this case, your career). You may use 5% unless you are very optimistic on your future cash flow (in which case the rate should be higher)
  • you should take net income, as that would be the real cash flow generated
  • you can either add the pension or consider net income + social security contribution for the years when you work, for simplicity, assuming your social security contributions would be equal to the future pension

Best,

Francesco

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Clara
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replied on Mar 27, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

I would indeed go with average salary during your working years.

To make it more accurate, I would divide you work life into clusters of 10 years and calculate an average for that spam -given that your salary in your 20s has (hopefully) nothing to do with your salary in your 50s-.

After this little improvement, I would go with your method.

Hope it helps!

Cheers,

Clara

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Anonymous C on Mar 27, 2020

sorry, how is that making it more accurate if we are talking about average salary?

Daniel
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replied on Mar 26, 2020
McKinsey / ex-Interviewer at McKinsey / I will coach you to rock those interviews

Hi!

  • Perpetuity calculation with avg salary and 5% sounds reasonable.
  • Take a net income for sure (we are interested in cash, so for individual it would be a net income).
  • Pensions I would not include, because those are your savings, aren't they? So, basically you have them already inside of your avg net income

Best,
Daniel

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Anonymous B replied on Mar 26, 2020

Hi,

the NPF formula requires cash flow, therefore I would deduct all essential costs from your net salary and then you have kind of a cash flow.

I would not use perpetuity, because it is your own NPV and a life is limited. Thus, I would have a look at the life expectancy of people and consider this as the time frame for your calculations.

Just two ideas how to optimize this.

Best

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Francesco gave the best answer

Francesco

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