Can someone please explain the break even calaculation?How is it 15 years?
Break even calculation
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Hello Ameja,
Can you specify what are your doubts?
I will try to clarify the solution dividing the calculation in 4 steps, (you can have a look at the graph in the bottom):
- Initial investment: 12k$ for investment bottles and 1500$ for drinking bottles, 13500$ totally Cumulative return: -13500$
- First 5 years: no revenues from selling bottles. As costs we have monthly $300 for purchase of drinking wine, $600 for investment wine, and $200 for maintenance of the cellar. In total 12*1100$=13200$ per year Cumulative return: -13500$ - 5* 13200$= -79500$
- End of 5th year: selling of the initial stock. Per each bottle we receive $100*(1 + 20%)^5=250$ (approximately). We have an inital stock of 120 investment bottles, so 120*250$=30k$ Cumulative return: -79500$ +30000 $ =-49500$
- Starting from 6th year: Costs stable at 13200$ per year, revenues of 72*$250=$18,000. We have a net return of 4800$ per year. Years needed to break even: - 49500$ / 4800$ = 10.3 years. So we have that we will have a positive cumulative return starting from year 16 (15 years after).
Feel free to contact me for further discussion.
Hope it helps,
Luca
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Yes, so after the 5th year he will start to earn money! The Profit will be appx. 5,000€, if you deduct the 30,000 profits from the initial stock, there is left 50,000 of the investment (appx 80,000 - 30,000= 50,000)! So, he needs 10 years to break even + the first 5 years, in total of 15 years!
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Can you be more specific on your question?
It is 15 years as the cumulative profit turns from negative to zero in year 15.
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