Schedule mock interviews on the Meeting Board, join the latest community discussions in our Consulting Q&A and find like-minded Case Partners to connect and practice with!
Back to overview
Anonymous A
on Feb 16, 2021
Global
Question about

NPV Calculation

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

3 Answers
2.3k Views
20
Be the first to answer!
Nobody has responded to this question yet.
Top answer
Ian
Coach
edited 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 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 costs180 * 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

Clara
Coach
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

Similar Questions
Consulting
Expected Salary for Corporate Strategy role - Senior Associate in Dubai (UAE)
on Nov 12, 2024
Global
6 Answers
1.1k Views
Top answer by
Pedro
Coach
52
6 Answers
1.1k Views
+3
Consulting
case books
on Nov 19, 2023
Global
5 Answers
2.6k Views
Top answer by
Nikita
Coach
112
5 Answers
2.6k Views
+2
Consulting
Consulting vs. Strategy & Ops -- what's the difference?
on Nov 20, 2023
Global
8 Answers
3.9k Views
Top answer by
Raj
Coach
172
8 Answers
3.9k Views
+5
How likely are you to recommend us to a friend or fellow student?
0 = Not likely
10 = Very likely
You are a true consultant! Thank you for consulting us on how to make PrepLounge even better!