NPV Calculation

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New answer on Sep 10, 2020
5 Answers
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Anonymous A asked on Sep 02, 2020

I am wondering when we calculate NPV should we use

1.NPV=EBIDTA/Discount Rate

or

2.NPV=Net Income/Discount Rate

Thank you in advance

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Vlad
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updated an answer on Sep 03, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

At the real projects it's EBITDA. However, the case is a very simplistic representation of the real-life situation, so in most of the cases you will just use the Net Profit

Best

(edited)

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Allen
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replied on Sep 02, 2020
Ex-McK Experienced Hire and EM - I show you how to perform at your best

Hello,

Typically you won't be given enough information to calculate EBITDA, just Net Income, so that's what I would use. Obviously, if you have all the information, don't ignore it!

In order to be thorough, you can also check with the interviewer whether you there is additional data to calculate a more accurate NPV. 99% of the time there won't be.

Does this help?

Allen

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Ian
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replied on Sep 02, 2020
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

You should use what's provided!

In most cases you will be given profits or cashflows which you can use. It wouldn't be much more complicated than that.

In general, you need to go the furthest possible. So, if they provide you with figures that would allow you to calculate EBITDA, then you should!

Also, don't forget that growth rate needs to be considered! If a growth rate exists, you need to subtract it from the discount rate.

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Antonello
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replied on Sep 10, 2020
McKinsey | MBA professor for consulting interviews
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Francesco
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replied on Sep 03, 2020
#1 Coach for Sessions (4.000+) | 1.500+ 5-Star Reviews | Proven Success (➡ InterviewOffers.com) | Ex BCG | 9Y+ Coaching

Hi there,

In theory it is neither of the two. You should use free cash flow as a reference:

V=FCF/r

However, in basically all the cases you can approximate it with net income (or EBITDA if present). Just be sure to clarify with the interviewer if it is ok to use it instead of FCF.

Best,

Francesco

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Vlad gave the best answer

Vlad

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McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School
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