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# NPV Calculation

Caribbean Island – MBB Final Round
New answer on Feb 16, 2021
1.9 k Views

Hi,

For the final NPV calculation, could you explain where the 11.25M and 1.88M figures come from? Thanks!

Total recurring profits = High season profits + Low season profits = 180 * x * 125 * ( \$600 - \$100) + 180 * 60% * 125 * ( \$400 - \$100) - \$2.17M = \$11.25M * x + \$1.88M

• Date ascending
• Date descending

A few key tips:

You should use NPV when:

• They say we should calculate out into perpituity (i.e. forever)
• They provide you with a discount rate, cost of equity/capital, etc.
• There is a set growth rate (into perpituity)
• They want a calculation into the next year or two
• As a default (i.e. always say "I could do NPV if needeD"

You should not use NPV when:

• You have offered and they say no
• For any calculations that are >= 3 years or < inifinity

The reason? They don't expect you to do the crazy math that NPV requires further than to the power of 2/3.

In this case, the answer is provided here: "Total recurring profits = High season profits + Low season profits = 180 * x * 125 * ( \$600 - \$100) + 180 * 60% * 125 * ( \$400 - \$100) - \$2.17M "

(edited)

Hi,
thanks for your question. Happy to make it clearer.

If x is our high season occupancy we have that:

• high season contribution margin (fixed costs excluded) = high season revenues - high season variable costs = 180 * x * 125 * ( \$600 - \$100) = \$11.25M * x
• low season contribution margin = 180 * 60% * 125 * ( \$400 - \$100) = \$4.05M
• yearly fixed costs = \$2.17M

Therefore we have:
Total recurring profits = \$11.25M * x + \$4.05M - \$2.17M = \$11.25M * x + \$1.88M

Does it make more sense?

Best,
Antonello

(edited)

Hello!

This is a great example of the use of contribution margins, that is totally key when calculating NPVs.

Cheers,

Clara