Question

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.

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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Initial investment: $1,550,000; Fixed costs: $420,000; Variable
costs: $8.10 per unit; Selling price: $28.80 per unit; Discount
rate: 14 percent; Project life: 6 years; Tax rate: 25 percent.
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