How do we know in 15 years it's going to break even

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! 

Hi Alex,

I think this is an interesting question that may be relevant for many people. I would be happy to share my thoughts on it:

• The solution as to why the break-even point is at the end of year 15 is explained in section "II. Analysis - Key question 2: What are the economics of the cellar over time in terms of money earned and money spent?".
• After the initial investment costs of $13,500, you have $13,200 in costs per year without any sales. At the beginning of year 6, when the wine has matured for 5 years, you create sales for the initial investment of $30,000. In the following years, you create sales of $18,000, resulting in yearly profits of $18,000 - $13,200 = $4,800. However, these profits need to offset the costs for the first 5 years when no sales were created, resulting in a break-even point at the end of year 15.

If you would like a more detailed discussion on how to address your specific situation, please don't hesitate to contact me directly.

Best,

Hagen

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.

Hey Alex,

Remember that all cases have solutions included! Here you can see their answer below.

Now, please do let us know if this isn't clear, and, importantly where/why you are still confused.