What is the deal with prep school? If you do not receive an appointment will the academy assign or recommend you to a prep school? Are there certain prep schools which are tied in with the academy besides NAPS? When would I have to apply to the prep schools? Would I have to apply before I find out my status at the Naval Academy?
There are two "types" of prep schools -- Naval Academy Prep School (NAPS) and Naval Academy Foundation schools (Foundation), of which there are maybe 12-20. NAPS is a federally funded school that was set up primarily to assist enlisted personnel who need additional preparation before attending USNA. Attendance is free of charge and, while at NAPS, you are essentially an enlisted person for that year. Foundation schools are private schools. Funding for candidates is partially provided by private donations to the Foundation and partially funded by parental contributions (based on ability to pay). As a general rule, if you successfully complete a NAPS/Foundation program, you will be appointed to USNA. Conversely, if after a year at prep school, you no longer want to attend USNA, you typically incur no obligation and go your own way.
When you apply to USNA, if you are not academically qualified for USNA, the Admissions Board automatically considers you for an offer to NAPS/Foundation. You need do nothing. Your BGO should ask you during the interview whether you are interested in either or both of those programs (some people are not interested in either or both, for various reasons). You do nothing "different" to be considered for NAPS/Foundation other than apply and see what happens.
Note, there are other prep schools that are not affiliated with USNA. Many claim to have high acceptance rates to the SAs. My only recommendation is to carefully research any such claims; unlike the USNA-affiliated schools, an appointment out of these schools is NOT guaranteed, automatic, etc.
Also, at my first nomination interview I was asked "What will you do if you do not receive an appointment to the Naval Academy?" and I said that I would go to prep school for a year and try again and that I will not stop until I get in. Was this a good answer?
The purpose of this question is typically to determine if a candidate has a "plan B." There is no "right" answer other than one that demonstrates the candidate has considered what he/she will do if an appointment isn't forthcoming. Some candidates plan to go NROTC. Others will go to prep school or do a year of civilian college and try again. Others will just go to civilian college. It's generally not wise to say that you're so confident you'll get in that you don't have a "plan B." Lots of things can happen, even to the most qualified candidates, that thwart one's plans.