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.

Homework Answers

Answer #1

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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