Finance-heavy cases often require you to evaluate the feasibility or return of an investment. Concepts like breakeven, payback period, net present value (NPV), and internal rate of return (IRR) are standard tools used by consultants to assess ROI and capital efficiency.
This article covers each concept with simple explanations, shortcuts for interviews, and examples that reflect typical consulting prompts.
1. Breakeven Analysis
Breakeven tells you how much volume or revenue is needed to cover all costs.
Breakeven Volume = Fixed Costs / Contribution Margin per unit
Example: If fixed costs = $500K and contribution per unit = $25 → Breakeven volume = 20,000 units.
Typical prompt:
“How many units must the client sell to recover their fixed investment of $1M, assuming a $50 contribution per unit?”
2. Payback Period
This measures how long it takes for an investment to pay for itself in cash terms—ignoring time value of money.
Payback Period = Initial Investment / Annual Cash Inflow
Example: If a project costs $800K and brings $200K per year → Payback = 4 years
Useful when evaluating short-term liquidity risk or comparing quick-return options.
3. Net Present Value (NPV)
NPV calculates the value today of future cash flows, discounting them using a required rate of return (usually 8–12%). A positive NPV means the investment adds value.
NPV = Σ (Cash Flowt / (1 + r)t) – Initial Investment
Consulting shortcut: Use rule of thumb for discounting:
- At 10%, $100 in 1 year ≈ $91, in 2 years ≈ $83, in 3 years ≈ $75
- Use tables or 10% decay logic: Year 1 = 100%, Year 2 = 90%, Year 3 = 81%
“If a client earns $100K annually for 3 years with a 10% discount rate, NPV ≈ $248K – Initial Investment”
4. Internal Rate of Return (IRR)
IRR is the discount rate that makes NPV = 0. It represents the project’s yield and is used to compare against the required return or cost of capital.
In interviews, you won’t calculate IRR precisely—but you may estimate or interpret it:
“If the IRR is 15% and the hurdle rate is 10%, this project creates value.”
IRR is especially helpful when comparing multiple projects with different scales or timelines.
5. Comparing the Tools
Metric | Use Case | Limitation |
---|---|---|
Breakeven | Volume required to cover costs | Ignores time and cash flows |
Payback | Time to recover investment | No time value of money |
NPV | Total value created (discounted) | Assumes discount rate is correct |
IRR | Rate of return on project | Can be misleading with non-standard flows |
6. Interview Use Cases
- Retail client: Use breakeven to determine volume needed for new store success
- Tech startup: Use NPV to evaluate new feature launch with multi-year impact
- Industrial firm: Use payback to assess machinery investment under capital constraints
- PE firm: Use IRR to benchmark deal returns
Final Thoughts
These tools help you quantify trade-offs in investment decisions. In case interviews, don’t just recite formulas—use them to support logic, evaluate feasibility, and highlight financial risks or upsides.
If you can estimate NPV mentally, identify the breakeven point, and explain IRR clearly, you’ll set yourself apart.