fixed costs

Oliver Wyman case: On the Right Track
New answer on Jun 22, 2021
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Yosha asked on Jun 21, 2021

do we include intial cost of investment in fixed costs? 

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Ian
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replied on Jun 22, 2021
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi Yosha,

Please don't mix up these 2 concepts - they really should never be used together.

Think about fixed costs with variable costs. Think about initial costs with annual costs.

 Fixed costs occur every year (i.e. equipment maintenace/repair, equipment depreciation, factory maintenace/repair, rent, etc.). Upfront investment costs occur in the first year and are what it costs to setup things (i.e. factory construction, bonds, legal fees, etc.)

If you're thinking about an investment decision/ROI, here's how the logic goes:

Your recuring annual revenues need to be greater than your recurring annual costs...and the difference between these two needs to aggregate to be larger than your upfront investment cost (to a high enough ROI). Finally, your recurring annual costs are broken down into fixed costs AND variable costs.

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Yosha on Jun 22, 2021

exactly thats what i know about the initial costs but in the case they add them together and thats what make me confused

Pedro
Expert
replied on Jun 21, 2021
Bain | EY-Parthenon | Roland Berger |Former Head Recruiter | Market Sizing

No, these are different concepts.

  • Typically in cases you want to check the return for your initial investment. So you most likely want to compare your yearly profit with your initial investment.
  • The initial investment is a one-off expense, whereas fixed costs are recurring expenses (monthly, yearly...).

Note: D&A is how you turn the initial investment (if it is in fixed assets) into an yearly cost. In most case you will ignore this as you are analyzing the investment from a cash perspective (not an accounting perspective, and in most instances you may also ignore tax impacts).

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Ian

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