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Accounting vs. NPV Break-Even - Which is better?

break-even analysis NPV payback
New answer on Nov 11, 2023
2 Answers
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Anonymous A asked on Jun 29, 2017

Hey folks,

I'm currently struggeling to identify the best way of calculating a break-even for investments/projects in case interviews.

Generally, there are two possibilities to do so: accounting brek-even and npv break-even analysis. My question is when is which approach better, and why?

Some thoughts:

I) Accounting Break-Even
Accounting break-even occurs where total revenues/cash flows equal total costs, thus profits are zero. Caluclation is pretty straight forward, as we just have to check in which year the sum of all cash flows equals the initial investment.

II) NPV Break-Even
Determine the point of time when the NPV switches from negative to positive, or find the year when NPV=0. Again, calculation is clear, as we need to discount all cashflows and check when they add up to the initial investment. However, since we consider risks, capital costs etc. with this approach, it makes the enitre method not only more precise but also more complex and time consuming.

(Further applications of NPV in this context is to just check whether overall NPV > 0 or set NPV=0 to determine the internal rate of return (IRR).)

Questions

1.) Is the NPV Break-Even viable for case interviews?
Previously, I was using NPV only for valuation and to examine whether the overall NPV of a project is > 0, thus a project should be executed.

2) How do I decide, which approach I should use?
Mention both and ask for the preference of the interviewer?

Thank you very much, appreciate any help!

Cheers

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Clara
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Content Creator
replied on Nov 11, 2023
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Precisely for the high amount of questions (1) asked by my coachees and students and (2) present in this Q&A, I created the “Math & Formulas - Economic and Financial concepts for MBB interviews”, recently published in PrepLounge’s shop (https://www.preplounge.com/en/shop/prep-guide/economic_and_financial_concepts_for_mbb_interviews).

After +5 years of candidate coaching and university teaching, and after having seen hundreds of cases, I realized that the economic-related knowledge needed to master case interviews is not much, and not complex. However, you need to know where to focus! Hence, I created the guide that I wish I could have had, summarizing the most important economic and financial concepts needed to solve consulting cases, combining key concepts theorical reviews and a hands-on methodology with examples and ad-hoc practice cases.

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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Danny replied on Jun 29, 2017

I think accounting break-even is enough because lots of candidates are from non-business background and may not know NPV, WACC, etc, and the interviewers know. They probably will not trick on this. However, if you are not confident enough in such detail, ask a clarifying question should be great.

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