Option 1: build a plant, investment cost = $52.5M, VC = $2/bottle
Option 2: Outsource production, VC = $2.25/bottle for first 20M bottles. $2.5/bottle for any production above 20M bottles.
Annual production level required = 40M bottles. What is the payback period of option 1 given the alternative is outsourcing? Answer: 3 years, 7.5 months.
Is there a simple way to get this answer?
You have to go by semesters…
1st Semester Difference: 20M * 2.25 - 20 * 2 = 5M
2nd Semester Difference: 20M * 2.5 - 20 * 2 = 10M
So to get to payback you have:
52.5 = 45 (3 years) + 5 (1st semester) + 2.5/10 (part of second semester) = 3Y + 6 monts + 25% * 6 months (1.5 months) = 3Y + 7.5 months.
Hi there,
Pedro has already provided an answer here, but I just wanted to flag how important it is that you fully understand how to use breakeven.
Payback period is just one form of breakeven (i.e. solving for years), so make sure you get a good amount of exposure to the other types of breakeven across cases (i.e. price, quantity, FC, VC, etc.)
Hello!
+1 to the previous answers and to the importance of breakeven. It´s probably the most important concept when looking into econ/math for consulting interviews. If you master it, you have done a great 80-20
Hope it helps!
Cheers,
Clara
Hi!
Pedro gave a great answer here!
I highly recommend reading more about consulting math and recurring concepts like payback, NPV, etc. There are several useful articles here on PrepLounge.
Best,
Anto
Expert case by
While in this case it was pretty easy to equate the 20M with the semester, but what I am actually doing is "plotting" the first 20M and then the second 20M to get to the payback.