Cookie and Privacy Settings

This website uses cookies to enable essential functions like the user login and sessions. We also use cookies and third-party tools to improve your surfing experience on preplounge.com. You can choose to activate only essential cookies or all cookies. You can always change your preference in the cookie and privacy settings. This link can also be found in the footer of the site. If you need more information, please visit our privacy policy.

Data processing in the USA: By clicking on "I accept", you also consent, in accordance with article 49 paragraph 1 sentence 1 lit. GDPR, to your data being processed in the USA (by Google LLC, Facebook Inc., LinkedIn Inc., Stripe, Paypal).

Manage settings individually I accept
expert
Expert with best answer

Francesco

100% Recommendation Rate

3,546 Meetings

18,847 Q&A Upvotes

USD 479 / Coaching

2

Probability calculation in NPV

NPV

If the client is bidding on a contract and 100% likely to win, the NPV is (operating profit of 9M/discount rate of 10% - upfront cost of 50M) = 40M..in the next question they ask what is your NPV if you now have a 50% chance of winning. They calculate this as 50% of 9M/discount rate of 10%, which is 45M..why are they applying the probability to the first half of the equation? Can someone explain this?

If the client is bidding on a contract and 100% likely to win, the NPV is (operating profit of 9M/discount rate of 10% - upfront cost of 50M) = 40M..in the next question they ask what is your NPV if you now have a 50% chance of winning. They calculate this as 50% of 9M/discount rate of 10%, which is 45M..why are they applying the probability to the first half of the equation? Can someone explain this?

(edited)

2 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with Francesco

100% Recommendation Rate

3,546 Meetings

18,847 Q&A Upvotes

USD 479 / Coaching

Hi there,

I guess you mean that the expected operating profit, not the NPV, is $45M (without considering the upfront cost).

If they are applying the 50% just to the operating profits, it means that the upfront cost is incurred whether or not you win the bid, so it doesn’t depend on that.

Hope this helps,

Francesco

Hi there,

I guess you mean that the expected operating profit, not the NPV, is $45M (without considering the upfront cost).

If they are applying the 50% just to the operating profits, it means that the upfront cost is incurred whether or not you win the bid, so it doesn’t depend on that.

Hope this helps,

Francesco

Book a coaching with Ian

100% Recommendation Rate

333 Meetings

29,482 Q&A Upvotes

USD 289 / Coaching

Hi there,

It literally depends on whether the upfront cost of 50M is incurred no matter what or based on acceptance of the contract.

If, no matter what, we get a op profit of 9M and a cost of 50M, then probability of 10% of 100% shouldn't change anything.

If op profit only occurs with a winning bid, we have to take the EV of that.

If upfront costs only occur with a winning big, we have to take the EV.

It sounds like the company has to make a $50M investment just to research the product etc...therefore, that cost is incurred no matter what, and you can't apply the 50% chance of winning to it!

Hi there,

It literally depends on whether the upfront cost of 50M is incurred no matter what or based on acceptance of the contract.

If, no matter what, we get a op profit of 9M and a cost of 50M, then probability of 10% of 100% shouldn't change anything.

If op profit only occurs with a winning bid, we have to take the EV of that.

If upfront costs only occur with a winning big, we have to take the EV.

It sounds like the company has to make a $50M investment just to research the product etc...therefore, that cost is incurred no matter what, and you can't apply the 50% chance of winning to it!

Related case(s)

Smart Meters

Solved 31.8k times
Smart Meters The municipal utility Hamburg Energized is a local energy retail (power and gas) and distribution grid company active in the city of Hamburg. The majority of shares of Hamburg Energized is held by the city itself. As the distribution system operator of Hamburg, Hamburg Energized is responsible for the operations and maintenance of the gas and electricity grid on customer level. In the course of the energy transition in Germany, the responsible board member for the technical grid operations, Jan Bremer, thinks about deploying Smart Meters in the gas and electricity grid. He approaches you with the request to conduct a feasibility analysis and to give a clear recommendation whether or not Hamburg Energized should use Smart Meters in its gas and electricity grid in the future.
4.4 5 699
| Rating: (4.4 / 5.0)

The municipal utility Hamburg Energized is a local energy retail (power and gas) and distribution grid company active in the city of Hamburg. The majority of shares of Hamburg Energized is held by the city itself. As the distribution system operator of Hamburg, Hamburg Energized is responsible for t ... Open whole case

Caribbean Island – MBB Final Round

Solved 8.2k times
Caribbean Island – MBB Final Round A wealthy client has recently bought an island in the Caribbean. She has engaged us to identify possible uses for her new island.
4.6 5 395
| Rating: (4.6 / 5.0)

A wealthy client has recently bought an island in the Caribbean. She has engaged us to identify possible uses for her new island. Open whole case

PE Portfolio Strategy

Solved 6.8k times
PE Portfolio Strategy We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not. We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given the other companies in our portfolio.
4.1 5 365
| Rating: (4.1 / 5.0)

We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not. We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given ... Open whole case

Cutting Carbs - Divestiture in the Electrical Power Market

Solved 2.4k times
Cutting Carbs - Divestiture in the Electrical Power Market Our client is Energy England, one of northern England’s largest electric utility companies. They were created over the past decade through an aggressive series of mergers of existing utility companies each specializing in a single energy generation source. Recently, the CEO has embarked on an initiative to return to the core of the business. She is looking to increase free cash flow and cash reserves in order to prepare the business for evolving future trends.   The following can be verbally provided to interviewee if asked: Energy England is made up of assets across the energy-generation space. These include coal, gas, nuclear, and wind We are looking to divest from just one of our previous acquisitions (i.e one target is sufficient) There are no specific goals/metrics – the client trusts our judgement
4.2 5 46
| Rating: (4.2 / 5.0)

Our client is Energy England, one of northern England’s largest electric utility companies. They were created over the past decade through an aggressive series of mergers of existing utility companies each specializing in a single energy generation source. Recently, the CEO has embarked on an initi ... Open whole case