NPV Calculation

Question

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

Answer 1

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

Answer 2

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

Answer 3

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.

Answer 4

Hi, in addition to the answers of other coaches I recommend reading this useful article: https://www.preplounge.com/en/bootcamp.php/business-concept-library/common-terms-of-business/net-present-value-npv

Hope it helps,
Antonello

Answer 5

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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