Is this 2 million euro investment worth it?
To judge an investment in an interview, you usually calculate two things: how long it takes to pay back, and what it earns in total relative to what it costs. You then compare those results with the client's requirement and with other possible uses of the same money.
What the interviewer is assessing
- That you choose the right measure. Payback answers "when do we get the money back", return answers "how much do we make". Say which one you are calculating and why.
- That you identify the annual gains correctly. What counts is the extra profit generated by the investment, not revenue.
- That you compare with a reference. A four-year payback can be excellent for a factory and mediocre for software.
- That you know the limits of the simple calculation: it ignores that money tomorrow is worth less than money today, and that expected gains are uncertain.
How to build your answer
- 1
Clarify what is invested and what is gained
The upfront amount, the annual gains or savings net of running costs, and how long the investment will produce its effects. - 2
Calculate the payback period
Investment divided by net annual gain. It is the most requested calculation, and the quickest. - 3
Calculate the return over the asset's life
Cumulative gains minus investment, relative to the investment. State the period, because a return with no duration means nothing. - 4
Compare and qualify
Set the result against the client's threshold, then flag in one sentence what the calculation leaves out.
How a good answer starts
"I will look at two things: the time needed to recover the 2 million, then what the machine earns over its life. You tell me it saves 600,000 euros a year in labour and scrap, but costs 100,000 euros a year to maintain. So the net saving is 500,000 euros a year.
2 million divided by 500,000 gives a payback of four years. With a life of eight years, the machine brings in 4 million in total, which is 2 million more than its cost: the investment is doubled in eight years. If the client requires payback in under five years, the project passes. I would add two caveats. This calculation ignores the time value of money, which makes the later years less attractive than they look. And everything rests on the savings estimate, which I would want to check at a site that already has the machine."
This example is made up: it shows the tone and the construction, not a script to memorise. Your answer has to come from your own experience or from the data the interviewer gives you.
Common mistakes
- Using the revenue generated instead of extra profit, or forgetting the running costs of the investment.
- Giving a percentage return without saying over how many years.
- Concluding it is worth it without comparing with a threshold or an alternative.
- Confusing payback with break-even, which is about a sales volume and not a number of years.
Follow-ups to expect
"What if savings come in 20% below plan?"
Redo the calculation with 400,000 euros a year: payback moves to five years. Say what that changes against the client's threshold.
"Why should future gains be discounted?"
Explain simply that a sum received in eight years is worth less than today, because it is uncertain and the money could have been invested in the meantime.
Frequently asked questions
Do I need to calculate a net present value in a consulting interview?
You need to understand the principle and be able to explain it. The full calculation is rarely asked for in your head. If the interviewer gives a discount rate, it is usually over one or two years, to check that you know to divide a future gain by one plus the rate.
What payback period counts as good?
It depends on the industry and the risk. Always ask the client for its criterion rather than applying a general rule: the comparison with its own threshold is what makes your conclusion useful.