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

Question

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?

Thanks in advance!

Answer 1

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

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

Answer 2

Hello!

Precisely for the high amount of questions (1) asked by my coachees and students and (2) present in this Q&A, I created the “Math & Formulas - Economic and Financial concepts for MBB interviews”, recently published in PrepLounge’s shop (https://www.preplounge.com/en/shop/prep-guide/economic_and_financial_concepts_for_mbb_interviews).

After +5 years of candidate coaching and university teaching, and after having seen hundreds of cases, I realized that the economic-related knowledge needed to master case interviews is not much, and not complex. However, you need to know where to focus! Hence, I created the guide that I wish I could have had, summarizing the most important economic and financial concepts needed to solve consulting cases, combining key concepts theorical reviews and a hands-on methodology with examples and ad-hoc practice cases.

It focuses on 4 core topics, divided in chapters (each of them ranked in scale of importance, to help you maximize your time in short preparations):

Economic concepts: Profitability equation, Break even, Valuation methods (economic, market and asset), Payback period, NPV and IRR, + 3 practice cases to put it all together in a practical way.
Financial concepts: Balance sheet, Income statement/P&L and Performance ratios (based on sales and based on investment), +1 practice case
Market structure & pricing: Market types, Perfect competition markets (demand and supply), Willingness to pay, Pricing approaches, Market segmentation and Price elasticity of demand, +1 practice case
Marketing and Customer Acquisition: Sales funnel, Key marketing metrics (CAC and CLV) and Churn, +1 practice case

Feel free to PM me for disccount codes for the guide, and I hope it helps you rock your interviews!

Answer 3

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)