Break even calculation

Oliver Wyman case: Setting up a Wine Cellar
New answer on Jan 02, 2020
3 Answers
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Ameya asked on Dec 27, 2019

Can someone please explain the break even calaculation?How is it 15 years?

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Luca
Expert
Content Creator
replied on Dec 27, 2019
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

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):

  1. Initial investment: 12k$ for investment bottles and 1500$ for drinking bottles, 13500$ totally Cumulative return: -13500$
  2. 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$= -79500$
  3. 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$
  4. 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

Breakeven calculation example

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Chris
Skilled
replied on Dec 27, 2019

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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R (Mck Final round)
Skilled
replied on Jan 02, 2020
Been through Bain Final Round

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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Luca gave the best answer

Luca

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