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

break-even analysis NPV payback
Recent activity on Jun 29, 2017
1 Answer
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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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Best answer
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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