Question

Assume that the project is expected to return monetary benefits of \$20,000 the first year, and...

Assume that the project is expected to return monetary benefits of \$20,000 the first year, and increasing benefits of \$5,000 until the end of project life (year 1 = \$20,000, year 2 = \$25,000, year 3 = \$30,000). The project also has one-time costs of \$30,000, and fixed recurring costs of \$10,000 until the end of project life. The project has a discount rate of 8% and a three-year time horizon.

Calculate the break-even point for this project.

Calculation for Break even point of the project

 Year Monetary Benefits (A) Recurring Costs (B) Net cash flow [ A - B] Discounting factor (8%) Discounted cash flow Cumulative discounted cash flow 1 \$ 20,000 \$ 10,000 \$10,000 0.92593 \$ 9,259.3 \$ 9,259.3 2 \$ 25,000 \$ 10,000 \$15,000 0.85734 \$ 12,860.1 \$ 22,119.4 3 \$ 30,000 \$ 10,000 \$20,000 0.79383 \$ 15,876.6 \$ 37,996 TOTAL \$ 37,996

One time cost ( Initial investment ) = \$ 30,000

Break even point of the project = 2 + [ { 30,000 - 22,119.4} / 15,876.6] years

Break even point = 2 + 0.49637 years = 2.49637 years or 2.5 years.

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