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1,000,000 = 1,000,000
1,000,000 What is the cash breakeven quantity? OCF = [(Pv)Q – FC – D] + D = (Pv)Q – FC
Q = (OCF + FC) / (P – v)
Q = (0 + 1,000,000) / (25,000 – 15,000) = 100 units 19
19 Three Types of BreakEven
Three
Analysis
Analysis Accounting Breakeven Cash Breakeven Where OCF = 0
Q = (FC + OCF)/(P – v) (ignoring taxes) Financial Breakeven Where NI = 0
Q = (FC + D)/(P – v) Where NPV = 0 Cash BE < Accounting BE < Financial BE 20
20 Example: BreakEven Analysis Consider the previous example Assume a required return of 18%
Accounting breakeven = 200
Cash breakeven = 100
What is the financial breakeven point?
• Similar process to that of finding the bid price
• What OCF (or payment) makes NPV = 0? N = 5; PV = 5,000,000; I/Y = 18; CPT PMT = 1,598,889 = OCF • Q = (1,000,000 + 1,598,889) / (25,000 – 15,000) = 260 units The question now becomes: Can we sell at least 260
The
units per year?
units 21
21 Operating Leverage Operating leverage is the relationship between
Operating
sales and operating cash flow
sales
Degree of operating leverage measures this
Degree
relationship
relationship The higher the DOL, the greater the variability in
The
operating cash flow
operating
The higher the fixed costs, the higher the DOL
DOL depends on the sales level you are starting
DOL
from
from DOL = 1 + (FC / OCF) 22
22 Example: DOL Consider the previous example
Suppose sales are 300 units This meets all three breakeven measures
What is the DOL at this sales level?
OCF = (25,000 – 15,000)*300 – 1,000,000 = 2,000,000
DOL = 1 + 1,000,000 / 2,000,000 = 1.5 What will happen to OCF if unit sales increases by
What
20%?
20%? Percentage change in OCF = DOL*Percentage change in Q
Percentage change in OCF = 1.5(.2) = .3 or 30%
OCF would increase to 2,000,000(1.3) = 2,600,000 23
23 11
11 End of Chapter 24...
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This document was uploaded on 03/01/2014 for the course FINANCE 250 at Indiana.
 Spring '14
 Valuation

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