Discounted breakeven point

The ways of assessing profitabihty to be considered in this section are (1) discounted-cash-flow rate of return (DCFRR), (2) net present value (NPV) based on a particiilar discount rate, (3) eqmvalent maximum investment period (EMIP), (4) interest-recovery period (IRP), and (5) discounted breakeven point (DEEP). 

The cost of capital may also be considered as the interest rate at which money can be invested instead of putting it at risk in a manufacturing process. Let us consider the process data listed in Table 9-4 and plotted in Fig. 9-10. If the cost oi capital is 10 percent, then the appropriate discounted-cash-flow curve in Fig. 9-10 is abcdef. Up to point e, or 8.49 years, the capital is at risk. Point e is the discounted breakeven point (DEEP). At this point, the manufacturing process... 

Capital is at risk until the breakeven point has been reached. It is common practice to give consideration to the discounted breakeven point (DEEP), the time at which the (NPV) is zero when discounting at the cost of capital. At any time after the (DEEP), the project will have recovered its cost and provided a greater return on the capital than the cost of capital. It is customary for management to spread risk by diversifying the activities of a company among a portfoho of projects. 

With a disbursement of 1000 in Year 0, the discounted breakeven point (DEEP) will be reached in 3 years at a compound-interest rate of 30 percent if the annual net profit Avp = 550.63 per year. Thus, a... 

It is not normally possible to make a comprehensive assessment of profitabihty with a single number. The shape of the cumulative-cashflow and cumulative-discounted-cash-flow curves both before and after the breakeven point is an impoiTant factor. 

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. 

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