RIVES Economic Break-Even Revenue Explanation

RIVES Economic Break-Even Revenue Explanation - SMALL...

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SMALL BUSINESS CASE Economic Break-Even Revenue A number of students have asked for additional information on economic break-even revenue, so I’ve prepared the following explanation based on the small business case we used in class. I hope you find this useful. Objective To find the level of revenue that exactly covers all the cash operating costs (fixed and variable) and all the capital costs (initial investment and the cost of capital). Here, the cost of capital is the project’s hurdle rate or the required return. Calculations Calculating economic break-even revenue is basically a two-step process: Step 1: Compute the minimum after-tax cash flow (ATCF) required to cover capital costs. (This implicitly assumes that all operating costs are covered, so you don’t need to worry about this) Step 2: Compute the volume of revenue required to produce the ATCF from Step 1. This is economic break-even revenue . Step 1

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This note was uploaded on 03/10/2012 for the course BUS-FIN 620 taught by Professor Busfin620 during the Spring '12 term at Ohio State.

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RIVES Economic Break-Even Revenue Explanation - SMALL...

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