Breakeven analysis

Kasner, E., Breakeven Analysis Evaluates Investment Alternatives, Chemical Engineering, Feb. 26, 1979, pp. 117-118. 

Financial analysis of new technology can get fairly sophisticated, and detailed business plans can contain a variety of means of projecting revenues, but the most useful starting point for thinking about the finances of a technology oppormnity is simple breakeven analysis. 

Simple breakeven analysis turns on building a simple linear model relating various costs and price. Say we get a price P per unit of product for which we pay a fixed cost F and a variable cost V. If we sell n units of the product, we may calculate the net revenue R received as follows ... 

Figure 11.2 Breakeven analysis is illustrated by a plot of revenue versus volume. At zero volume, the fixed costs are fully charged. At breakeven, net revenue is zero, and above breakeven, the margin accumulates straight to the bottom hne.

Graphically, the situation is illustrated in Figure 11.2, where net revenue is plotted as a function of volume. Of course, the mathematics here is nothing fancy, but the beauty of breakeven analysis is in the distinction it makes between fixed costs and variable ones. By making that distinction, you can calculate roughly and quickly to better assess opportunities as they arise. 

Simple breakeven analysis is quite useful for getting a ballpark sense of when a given investment will start to payoff, but more sophisticated analysis will take account of the alternative uses of money and the fact that a dollar today is worth more than a dollar tomorrow. 

In writing a preliminary financial analysis, the main point is to determine whether the business has sufficient margins and volume to justify a business. This can range from a simple back-of-the-envelope breakeven analysis to a more complete set of 3-year pro forma. More formal texts on entrepreneurship (Timmons, 1999), business planning short courses and workbooks (www.fasttrac.org), and business planning software (www.bplan.com) can be used on the more formal end of this planning spectrum. 

The chapter considered the engineer s fear of financials and attempted to overcome it with a straightforward discussion of cash flow, income, and balance statements. The mathematics of these statements is simple arithmetic, but the confusion seems to come from not understanding a few key terms. The chapter also considered the utility of ratio analysis—what engineers might call dimensional analysis for companies—breakeven analysis, and the basics of the time value of money. Although a full discussion was beyond the scope of this chapter, the discussion served up the basics and may also serve to introduce more careful treatments in other courses or texts. 

With this in mind, your assignment is to determine the process that will minimize the price differential between toluene and benzene required to yield an NPV = 0. This design represents a discounted breakeven analysis of the process and will be used as an internal benchmark for conparing conpeting alternatives to produce benzene. In your analysis, you should use the following economic parameters ... 

The interest rate i in Eq. 15.42 can be selected as representative for the company, close to similar projects, or imposed as minimum acceptable. From profitability point of view the objective of a project is to maximise the net present value NPV. This implies not only recovering the initial investment, but also generating sufficient added value after the breakeven point. In this way NPV appears as a measure of the total value that could be achieved over a longer time. However, the analysis depends on the assumed value of the interest rate. This limitation can be removed by reference to the maximum achievable performance, the discounted rate of return. 

The term break-even analysis is often used to express the same concept for a single input variable. Here, the value of the input variable at which the decision is changed is determined. If the breakeven point lies within the range of expected values, the decision is said to be sensitive to that point. Thus, sensitivity and the break-even point are directly related. 

Therefore, the break-even analysis allows to determine the spread that equals the price of a conventional bond to the one of an inflation-linked bond. This approach assumes a risk-neutral pricing by which an investor treats conventional and inflation-linked bonds the same. Under break-even hypothesis, both bonds have the same nominal yield. Note if the inflation breakeven is greater than expected inflation, for an investor is favorable to buy a conventional bond. Conversely, the inflation-linked bond is more attractive. If inflation breakeven and expectations are equal, the investor bond s choice will be then indifferent. Figure 6.2 shows the trend of UKGGBEIO and UKGGBE20 Index... 

ALARP concept basically comes from the British health and safety system (Act 1974)- It is not in true sense a quantitative method, although cost—benefit analysis is often used to get ALARP. It is a challenging subjective method, as it requires duty holders and others to exercise their judgment very carefully. In risk analysis, three factors play important role, viz. trouble, time, and cost. The breakeven point in... 

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