Concept Questions

11.4a If a project breaks even on an accounting basis, what is its operating cash flow? 11.4b If a project breaks even on a cash basis, what is its operating cash flow? 11.4c If a project breaks even on a financial basis, what do you know about its discounted payback?

The general break-even expression

Ignoring taxes, the relation between operating cash flow (OCF) and quantity of output or sales volume (Q) is:

FC = Total fixed costs P = Price per unit v = Variable cost per unit As shown next, this relation can be used to determine the accounting, cash, and financial break-even points.

II. The accounting break-even point

Accounting break-even occurs when net income is zero. Operating cash flow is equal to depreciation when net income is zero, so the accounting break-even point is:

A project that always just breaks even on an accounting basis has a payback exactly equal to its life, a negative NPV, and an IRR of zero.

III. The cash break-even point

Cash break-even occurs when operating cash flow is zero. The cash break-even point is thus:

0 0

Post a comment