Breakeven Analysis

Breakeven analysis determines the feasible value or value interval of the critical factor at which economic trade-offs are balanced.

Breakeven Point

The value of a factor y at which two alternatives are economically equivalent.

If there is only one alternative, the EW is equal to zero.

If there are more than two alternative, the breakeven points may be more than one.

Project Balance (PB)

The cumulative amount of money committed to a project at a specified period.

Project Breakeven Point

Given an interest rate i, the project gets the breakeven at time point m at which PB(i)m = 0

m is the discounted payback period.

Common Problems

Annual revenue and expenses. Solve for the annual revenue required to equal (breakeven with) annual expenses. 

Rate of return. Solve for the rate of return on the increment of invested capital at which two given alternatives are equally desirable.

Minimum attractive rate of return. Solve for the interest rate value that would result in indifference as to the preference for an alternative.

Equipment life. Solve for the useful life required for an engineering project to be economically justified.

Capacity utilization. Solve for the hours of utilization per year, for example, at which an alternative is justified or at which two alternatives are equally desirable.