Question

Is there a relationship between break-even point and cost of capital?

Answer 1

Solution:

For a break-even point is that point where there is no profit and no loss. In other terms, we can say that the NPV is zero at the breakeven point. NPV is the discounted value of future cash flows. Lower the discount rate, higher will be the present value hence break-even will be reached early

NPV = -Initial cost + PV of future cash flow

NPV = -Initial cost + FV1 / (1+cost of capital) + FV2 / (1+cost of capital)^2 + ..................

Hence we can say that there is a direct relationship between break-even point and the cost of capital. Lower the cost of capital, lower will be the break-even-point.