Diagram 2: What happens between year 5 and 6

Question

How do you explain the steep increase from year 5 to year 6 in Diagram 2?
In my opinion, there should be a revenue of $30,000 from the sale of the 120 investment bottles * $250, and a cost of 72 bottles*$100 to restock the cellar. Therefore we'd have a profit of $16,800 in that year. (Instead, it looks like there's a profit of ~$40k or something in the diagram)

That also means that we'd need more time to break even.

Am I missing something? Do we have more revenue from year 5 to 6?

Answer 1

In year 6, you sell both the 120 bottles you bought as initial investment (that's 30k revenue) and the 72 bottles you bought for sale during that year (18k revenue).

So you are actually selling 192 bottles for $48k.

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

Look at year 1: you buy both the “initial 120” as well as the “regular 72” you get to buy every year, which is also sold on year 6.

-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

Hi there,

This is indeed an interesting question which is probably relevant for quite a lot of users, so I am happy to provide my perspective on it:

You are right except for the fact that you should not forget that in year 6, you sell both the 72 bottles you bought for sale during the year (at $18k of revenues) and the 120 bottles you bought as initial investment (at €30k of revenues).
As such, you are selling 192 bottles in total for $48k.

In case you want a more detailed discussion on how to best approach breakeven question in case study interviews, please feel free to contact me directly.

I hope this helps,

Hagen

Answer 3

Hey Sophie,

Pedro already gave a very thorough answer here, but just remember to be particularly careful with breakeven cases! Make sure you're clear on which year is which and where initial investments/sales occur!

Answer 4

Given that the investment strategy is to hold each bottle of wine for exactly 5 years before selling, they will not s... (read entire answer)

Given that the investment strategy is to hold each bottle of wine for exactly 5 years before selling, they will not sell everything in the inventory immediately at year 5. If w... (read entire answer)