Info

Net income

$ 0

Remember, because we are discussing a proposed new project, we do not consider any interest expense in calculating net income or cash flow from the project. Also, notice that we include depreciation in calculating expenses here, even though depreciation is not a cash outflow. That is why we call it an accounting break-even. Finally, notice that when net income is zero, so are pretax income and, of course, taxes. In accounting terms, our revenues are equal to our costs, so there is no profit to tax.

Figure 11.4 presents another way to see what is happening. This figure looks a lot like Figure 11.3 except that we add a line for revenues. As indicated, total revenues are zero when output is zero. Beyond that, each unit sold brings in another $5, so the slope of the revenue line is 5.

From our preceding discussion, we know that we break even when revenues are equal to total costs. The line for revenues and the line for total costs cross right where output is at 450 units. As illustrated, at any level of output below 450, our accounting profit is negative, and, at any level above 450, we have a positive net income.

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