Break even ocf s vc fc d d ocf 20025000

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Unformatted text preview: F 1,000,000 = 1,000,000 1,000,000 What is the cash break-even quantity? OCF = [(P-v)Q – FC – D] + D = (P-v)Q – FC Q = (OCF + FC) / (P – v) Q = (0 + 1,000,000) / (25,000 – 15,000) = 100 units 19 19 Three Types of Break-Even Three Analysis Analysis Accounting Break-even Cash Break-even Where OCF = 0 Q = (FC + OCF)/(P – v) (ignoring taxes) Financial Break-even Where NI = 0 Q = (FC + D)/(P – v) Where NPV = 0 Cash BE < Accounting BE < Financial BE 20 20 Example: Break-Even Analysis Consider the previous example Assume a required return of 18% Accounting break-even = 200 Cash break-even = 100 What is the financial break-even 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 break-even 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.

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