Break-even rates

A squeeze of this nature pushes up the break-even rate of operation, and sets into motion a vicious cycle. Any individual operator can usually show that his profits will be higher if he can operate near capacity even if he obtains the added volume by reducing his prices. Somewhat paradoxically, it is sometimes the most inefficient operator who feels the greatest pressure to gain this additional volume, because his break-even rate of operation is so high as compared with the more efficient producer. 

In other words, if market interest rates rise, the mark-to-market (mtm) value of a receive-fixed swap will be increasing as discounting rates rise. In turn, this means that the break-even rate of the swap moves lower hence a market making swap bank will require a lower fixed rate if it is to price the swap correctly as discounting rates rise. 

On the other hand, consider a receive-fixed IRS where the fixed payment is on an annual basis, while the floating leg pays quarterly 3-month Libor. If discounting rates rise, then this will affect the fixed leg payments by more than the floating leg payments, because fixed payments are received on a lower frequency and at a later time, so there is more time for the impact of discounting to take effect. In this case, the value of the receive-fixed swap is decreasing as discounting rates rise. Here, the break-even rate of the swap moves higher as rates rise. 

As Deacon and Derry (1998, page 91) states, this problem is exacerbated if the maturity of both bonds is relatively short, because the less time to an indexed bond s maturity date, the greater the impact of its nonindexed component. To overcome this flaw, the break-even rate of inflation is used. This is derived by using the Fisher identity, with the risk premium p set to an assumed figure, such as 0, to relate the yield on the conventional bond to a yield on the indexed bond derived using an assumed initial inflation rate. The result is a new estimate of the expected inflation rate i, which is then used to recalculate the indexed bond s yield. The new yield, in turn, is used to produce a new estimate of the expected inflation rate. The process is repeated until a consistent value for i is obtained. 

Discounted cash-flow analysis, used to calculate the present worth of future earnings (Section 6.10.3), is sensitive to the interest rate assumed. By calculating the NPW for various interest rates, it is possible to find an interest rate at which the cumulative net present worth at the end of the project is zero. This particular rate is called the discounted cash-flow rate of return (DCFRR) and is a measure of the maximum rate that the project could pay and still break even by the end of the project life. 

In 1969, the chemical industry was operating at an average 81% of capacity. For ammonia the rate was even less than this. This meant that the large new plants were probably just breaking even, but the smaller, less efficient ones, which had to run at full capacity to show a profit, were losing money. The result was that about 20 of the smaller and less efficient ammonia plants were shut down. 

In general, one or more of three methods are used to justify major expenditures. The first, payback, is a measure of the time it will take for cumulative benefits to equal cumulative costs (time to break even). This, by itself, may not be sufficient to compare alternative investments and projects competing for the same limited resources so one of two other methods may be used. These methods, Net Present Value and Internal Rate of Return, consider the earning power of money in making comparisons. Because investments earn compound interest, a dollar to be gained in the future has less present value than one gained today. The NPV is computed by estimating the yearly... 

There is good reason not to use AWP in country U. Suppose that drug firms in some country are able to earn above-normal rates of return on new products, year in and year out. If monopoly rents are built into AWP there, they should surely be backed out if the analysis is to be done from a true societal perspective. The argument in Gold et al. (1996) that prices must be at least high enough for firms to break even does not preclude the possibility that most ventures do much better than just break even. 

DCFR values are an estimate of a projects earning potential. Obviously the higher the DCFR of a project then the more attractive it is. The minimum acceptable DCFR value is the value that equals the companies required rate of return. The DCFR can be thought of as a mortgage rate such that if a project repays interest to its investors at a rate equal to the projects DCFR then the project will break-even at the end of its life, and the mortgage will be paid off. 

The Net Present Value (NPV) of a capital investment is the equivalent total cash flow generated by all the acquisition s benefits less all the acquisition s costs computed over the life of the system on a year to year basis, adjusted for the value of money as reflected by such factors as finance rates, and projected ("discounted") to the present day. A dollar benefit projected for the system next year would only be worth 0.91 today if that dollar could be earning 10% interest. A net present value of zero means that the acquisition will, over its projected life, just break even and that it is therefore an acceptable purchase. A better than zero NPV would be a high priority purchase since it indicates a real profit. 

The Internal Rate of Return (IRR) is the equivalent interest rate at which the Net Present Value of the acquisition would be zero. Given the projected total cost of the system, and the projected total benefits of the system, both projected back (discounted) to today, it is the interest rate that the investment could sustain and still just break even. Since firms, in general, operate at a point where their incremental cost of money is equal to its incremental earning power, any investment that returns an IRR better than the cost of money is a good investment. Traditionally, the IRR is found by calculating the NPV with different interest factors in a trial and error method until the interest factor is found which drives the NPV to approximately zero. 

There is little evidence that insurance companies underprice premiums when real interest rates are high only to hit consumers hard once interest rates drop (Tort Policy Working Group 1987). The collusion needed to coordinate such behavior appears impossible. The 20 largest general liability insurers controlled only 66 percent of fhe market in 1987 (Harrington 1988, 44). If some companies collude fo raise premiums above fhe break-even level, ofher firms can raise new capital and enter the market. ... 

Real interest rates, of course, do and should play a role in insurance prices because premiums are paid before claims are settled. So fufure claims must be discounted by the current real interest rate to calculate a break-even premium. When real interest rates rise, premiums decline when real interest rates decline, premiums rise. Smith (1989, 95) reports that interest rates have a significant and sizeable effect on premium levels. For every 1.0 percent increase in interest rates, premiums are reduced by 1.2 percent. 

Figure 8.3-5 shows the discounted cumulative cash-flow as a function of elapsed years. With the assumptions contained in this qualitative discussion, we found that the discounted break-even period is 4 years when the product can be sold at 220 EUR/kg, it is 9 years when the price is 150 EUR/kg, but it is more than 20 years if the price falls to 120 EUR/kg. These results are obtained assuming an inflation rate of 3% per year. 

Is it possible to plan your retirement so you can live with style and still break even at the end All you need to do is spend your income and nest egg at just the right rate. Intriguing ... 

Discounted cashflow rate of return (DCFRR). This method is called the investors return on investment, internal rate of return, profitability index, interest rate of return, or discounted cashflow. A trial-and-error solution is necessary to calculate the average rate of interest earned on the company s outstanding investment in the project. It can also be considered the maximum interest rate at which funds could be borrowed for investment in the project, with the project breaking even at the end of its expected life. 

Selling price may change depending on the production level P due to market circumstances. Figure 3 shows a plot of the sales revenue, which, for illustration, is linear with P. It also shows the total product cost plotted at various production levels, which nearly depends on the 0.6 power of P. At high production levels, total production costs lay below the possible sales revenue the difference between the two costs indicates the total profit at that production level. At low production levels total production costs are larger than the possible sales revenue, and plant operation yields losses. The production level at which total costs equal the possible revenues is the break-even point. Plant production and sales must run at higher rates for the operation to be competitive. 

Figure 6-3 gives a graphical analysis of the effect on costs and profits when the rate of production varies. As indicated in this figure, the fixed costs remain constant and the total product cost increases as the rate of production increases. The point where the total product cost equals the total income is known as the break-even point. Under the conditions shown in Fig. 6-3, an ideal production rate for this chemical processing plant would be approximately 450,000 kg/month, because this represents the point of maximum net earnings. 

A process plant making 2000 tons per year of a product selling for 0.80 per lb has annual direct production costs of 2 million at 100 percent capacity and other fixed costs of 700,000. What is the fixed cost per pound at the break-even point If the selling price of the product is increased by 10 percent, what is the dollar increase in net profit at full capacity if the income tax rate is 34 percent of gross earnings ... 

Designate the discounted-cash-flow rate of return as i. This rate of return represents the after-tax interest rate at which the investment is repaid by proceeds from the project. It is also the maximum after-tax interest rate at which funds could be borrowed for the investment and just break even at the end of the service life. 

This study concluded that processing of MPW with VR at a capacity of 200 000 ton/yr (80000 ton/yr MPW and 120000 ton/yr VR), is economically feasible for Saudi Arabian conditions. This capacity is adequate in view of the amount of MPW generated in Saudi Arabia. The internal rate of return (IRR) is about 14.6% with a payback period of 6.4 years and break-even capacity of 47.6%. Although profitability is not very attractive, the project is recommended to solve the waste disposal problem of both MPW and VR. Some assistance should be provided to operate these plants through environmental protection agencies. 

The future reduction in PEM fuel cell prices is indicated in Fig. 6.1 in terms of two curves corresponding to learning rates of 10-20% corresponding to the limiting cases of photovoltaic modules and wind turbines over the recent decade. Even with the lower curve, break-even with current vehicles would not be reached until the cumulated production reached about 500 GW. However, difficulties with the market for oil products (peaking production, instability of major supplier countries) may make PEM fuel cell vehicles competitive at higher prices than the currently seen break-even price. 

Boiling liquids, heat-transfer coefficients for, 597 Bonds, interest rate on, 248-249 Book value definition of 277 in replacement analysis, 332 Box-Wilson design, 766, 769 Break-even chart, 155-156... 

Investment, discounted cash flow and internal rate of return, net present value, and break-even... 

This particular rate is called the discounted cash flow rate of return (DCFROR) and is a measure of the maximum interest rate that the project could pay and still break even by the end of the project life ... 

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