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How do we get to a break even of ca. 15 years?

Oliver Wyman case: Setting up a Wine Cellar
New answer on Nov 11, 2023
799 Views

I understand the following:

Costs:

Kickstart costs of \$13,500 in y0 (or beginning of year 1). Other costs (drinking wine, investing wine, maintenance) of 13,200/yr x 5 years = \$66,000.

Revenue:

120 investment bottles (from kickstart invest) * \$250/bottle = \$30K after 5 years.

72 bottles * \$250/bottle = \$18K after 5 years.

Profit:

\$30K + \$18K - \$13.5K - \$66K = - \$32K.

Brek Even:

- \$32K / \$4.8K (\$18K - \$13.2K) = 6.6 years (round to 7 years)

If I assume that we have a gross margin of \$4.8K / yr after year 6 and we have an additional 7 years, I get 13 years. Not 15. What am I missing?

• Date ascending
• Date descending

First of all, you need to review terminology and be more careful on how you present things. What you have there as Profit is something else: it is the cummulative cash flow from year 1 to 5 (-32k). However, there is a mistake there, as you only start selling during year 6. So you are wrongly anticipating all the revenues by one year!

Then I don't know how you get to 13 years. If you have 5 years + 7 years, that's 12 years.

This is the cash flow per year. Each bullet number is the year and between parenthesis the accumulated cash flow

1. -13,5k -13,2k (-26,7k)
2. -13,2k (-39,9k)
3. -13,2k (-53,1k)
4. -13,2k (-66,3k)
5. -13,2k (-79,5k)
6. -13,2k +30k +18k (-44,7k)
7. -13,2k +18k (-39,9k)
8. -13,2k +18k (-35,1k)
9. -13,2k +18k (-30,3k)
10. -13,2k +18k (-25,5k)
11. -13,2k +18k (-20,7k)
12. -13,2k +18k (-15,9k)
13. -13,2k +18k (-11,1k)
14. -13,2k +18k (-6,3k)
15. -13,2k +18k (-1,5k)
16. -13,2k +18k (3,3k) → Break Even.

(edited)

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Hi there,

Pedro beat me to the answer! But I just want to add how important breakeven is. Make sure you truly understand how Breakeven works, including all of the various applications (solve for # of years, VC, FC, investment, # of units, price, etc)

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