Break-Even Analysis
SEAT
Break-Even
Example
1
Systematic Economic Analysis Technique (SEAT)
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Identify the investment alternatives.
Define the planning horizon.
Specify the discount rate.
Estimate the cash flows.
Compare the alternatives.
Perform supplementary analyses.
Select the preferred investment.
SEAT
Break-Even
Example
2
Break-Even Analysis
• Determine the value of one or more parameters that will
make the PW = 0 (or FW = 0 or AW = 0)
• Typical problems are the following:
o
o
Minimum sales/usage required to justify a capital
investment?
How long annual savings must occur to justify an
investment?
SEAT
Break-Even
Example
3
Example—Minimum Usage?
A shopping center is considering paying $15,000 for a snow plow and blower,
which will have a 5-year life, a negligible salvage value, and daily O and M
expenses of $150. The firm can contract to have the snow removed at a cost of
$450/day. With a 10% MARR, how many days per year must the snow
plow/blower be used in order to justify the purchase?
Letting N denote the number of days the snow plow/blower is used each year and
setting the annual cost (AW) equal to zero:
$15,000(A|P 10%,5) + $150N  $450N = 0
N = 50(A|P 10%,50) = 13.19 days/year
or
N =PMT(10%,5,50) = 13.19 days/year
SEAT
Break-Even
Example
4