Since 2014
Properties of the Financial Break-Even Point in a Simple Investment Project As a Function of the Discount Rate
Journal of Economic & Financial Studies
View Archive Info| Field | Value | |
| Title |
Properties of the Financial Break-Even Point in a Simple Investment Project As a Function of the Discount Rate
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| Creator |
Tarzia, Domingo Alberto
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| Subject |
Economics; Finance
Financial break-even point; Investment project; Net present value; Discount rate; Accounting break-even point; Asymptotic behavior; Sensitivity analysis. C02; C63; G10; G31 |
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| Description |
We consider a simple investment project with the following parameters: I>0: Initial outlay which is amortizable in n years; n: Number of years the investment allows production with constant output per year; A>0: Annual amortization (A=I/n); Q>0: Quantity of products sold per year; Cv>0: Variable cost per unit; p>0; Price of the product with P>Cv; Cf>0: Annual fixed costs; te: Tax of earnings; : Annual discount rate. We also assume inflation is negligible. We derive a closed expression of the financial break-even point Qf (i.e. the value of Q for which the net present value (NPV) of the investment project is zero) as a function of the parameters I, n, Cv, Cf, te, r, p. We study the behavior of Qf as a function of the discount rate and we prove that: (i) For negligible Qf equals the accounting break-even point Qc (i.e. the earnings before taxes (EBT) is null); (ii) When is large the graph of the function Qf = Qf(r) has an asymptotic straight line with positive slope. Moreover, Qf (r) is an strictly increasing and convex function of the variable ; (iii) From a sensitivity analysis we conclude that, while the influence of p and Cv on Qf is strong, the influence of Cf on Qf is weak; (iv) Moreover, if we assume that the output grows at the annual rate g the previous results still hold, and, of course, the graph of the function Qf = Qf (r,g) vs r has, for all g>0 the same asymptotic straight line when r trends to infinite as in the particular case with g=0. From our point of view, a result of this type is the first time which is obtained by a simple investment project being the cornerstone of our proof the explicit expression of the net present value and the corresponding financial break-even point value. A policy implication of our findings is that the results can be taken into account for investment projects, especially in countries with very small or very large discount rates.
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| Publisher |
LAR Center Press
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| Contributor |
CONICET, Argentina
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| Date |
2016-05-06
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion Peer-reviewed Article |
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| Format |
application/pdf
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| Identifier |
http://journalofeconomics.org/index.php/site/article/view/226
10.18533/jefs.v4i02.226 |
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| Source |
Journal of Economic & Financial Studies; Vol 4, No 02 (2016): April; 31-45
2379-9471 2379-9463 |
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| Language |
eng
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| Relation |
http://journalofeconomics.org/index.php/site/article/view/226/284
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| Rights |
Copyright (c) 2016 Domingo Alberto Tarzia
http://creativecommons.org/licenses/by/4.0 |
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