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NPV Calculation

Caribbean Island – MBB Final Round
New answer on Feb 16, 2021
3 Answers
1.9 k Views
Anonymous A asked on Feb 16, 2021

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

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Ian
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updated an answer on Feb 16, 2021
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

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)

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Antonello
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updated an answer on Feb 16, 2021
McKinsey | NASA | top 10 FT MBA professor for consulting interviews | 6+ years of coaching

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)

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Clara
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replied on Feb 16, 2021
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

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

Cheers,

Clara

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Ian

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