Break even point analysis

Question

short question: Why was the formula for calculating the break even point not used here? Because we are shown the exhibit directly by the interviewer and then know anyway that the break even point occurs after 15 years? Or because the formula for the case makes no sense?
It was at least my first instinct after the initial question to apply this formula and I wonder if that was wrong.

Answer 1

Hi Lena,

I think this is an interesting question that may be relevant for many people. I would be happy to share my thoughts on it:

Given that no revenues are generated in the first 5 years because the wine must mature, and higher revenues are generated in year 6 from initial investment costs, you do not have the same yearly profits from year 1 onwards, making the application of the break-even formula impossible.
As such, I would advise you to calculate the client's profitability for years 1-6 individually, and then apply the break-even formula for the remaining years.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

Answer 2

Hi there,

The others answered this excellently.

I just want to add how important breakeven is. Make sure you truly understand how Breakeven works, including all of the various applications (solve for # of years, VC, FC, investment, # of units, price, etc)

Answer 3

Because the cash flow is not the same every year, so you cannot use the formula as it is.

If the interviewer asks you to estimate this how it should look like (of course, you can just estimate the cash flow up to year 6, and then apply the formula to get to breakeven year):

-13,5k -13,2k (-26,7k)
-13,2k (-39,9k)
-13,2k (-53,1k)
-13,2k (-66,3k)
-13,2k (-79,5k)
-13,2k +30k +18k (-44,7k)
-13,2k +18k (-39,9k)
-13,2k +18k (-35,1k)
-13,2k +18k (-30,3k)
-13,2k +18k (-25,5k)
-13,2k +18k (-20,7k)
-13,2k +18k (-15,9k)
-13,2k +18k (-11,1k)
-13,2k +18k (-6,3k)
-13,2k +18k (-1,5k)
-13,2k +18k (3,3k) → Break Even.

Answer 4

Hello!

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It focuses on 4 core topics, divided in chapters (each of them ranked in scale of importance, to help you maximize your time in short preparations):

Economic concepts: Profitability equation, Break even, Valuation methods (economic, market and asset), Payback period, NPV and IRR, + 3 practice cases to put it all together in a practical way.
Financial concepts: Balance sheet, Income statement/P&L and Performance ratios (based on sales and based on investment), +1 practice case
Market structure & pricing: Market types, Perfect competition markets (demand and supply), Willingness to pay, Pricing approaches, Market segmentation and Price elasticity of demand, +1 practice case
Marketing and Customer Acquisition: Sales funnel, Key marketing metrics (CAC and CLV) and Churn, +1 practice case

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