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2.1.10 Changing tariffs to reach the breakeven point

We will return to the Editor to change the rental tariff for the business.

  1. Open the Tariffs dialog and change the Rental Tariff to EUR 3.5*.

*Chosen based on the assumption that if NPV was – EUR 60,000 in Y10, then to increase revenue by EUR 60,000, could charge an extra EUR 6.00 for each of 1000 customers each year for 10 years.

  1. Run the model and look at the NPV graph.

Figure 1: NPV graph with Rental Tariff = EUR 3.5/month

Can you work out why NPV is still approx. negative EUR 42,000 at end of Y10? There are several reasons, including:

  • cash flows are discounted, so values are significantly lower in Y10
  • when calculating an additional EUR 0.5 rental tariff, we made the assumption that there were 1000 customers each year, whereas customer numbers don’t actually reach this value until near end of Y10 (see Connections graph).
  1. Change the Rental Tariff to EUR 4.5 and EUR 5.0 and see what affect this has on NPV.

Figure 2: NPV with Rental Tariff = EUR 4.5/month (left) and EUR 5.0/month (right)

With a Rental Tariff of EUR 5.0/month, the NPV reaches a breakeven point at the end of Y9.

  1. Now look at the Operating Profit Margin graph.

Figure 3: Operating Profit Margin with Rental Tariff = EUR 5.0/month

You can see that at the end of Y6, the operating profit margin is more than 40%: it is important to have a good operating profit margin for a successful business due to the lag between capital expenditure and revenue.

In the next part of this tutorial, we will use the scenario feature of STEM to determine what actual tariff values are required to get payback after 2, 3 and 5 years, and will show the solutions in a single graph.

Things that you should have seen and understood

Changing Rental Tariffs
Breakeven point, Importance of Operating Profit Margin

 

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