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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