break even point formula in dollars per period

#BREAK EVEN POINT FORMULA IN DOLLARS PER PERIOD HOW TO#

How to Interpret Payback Period in Capital Budgeting In addition, the potential returns and estimated payback time of alternative projects the company could pursue instead can also be an influential determinant in the decision (i.e. While there certainly are exceptions (i.e., projects that necessitate significant time before generating sustainable profits), a large portion of companies – especially those that are publicly traded – tend to be more short-term oriented and focus on near-term revenue and earnings per share (EPS) targets.įor a public company, the share price of the company could falter if near-term sales or profitability goals are not met, as the market is unlikely to uphold the current valuation just because management claims to be operating with a longer-term horizon in mind.Įach company will internally have its own set of standards for the timing criteria related to accepting (or declining) a project, but the industry that the company operates within also plays a critical role.

In contrast, the longer it takes for a project to “pay for itself”, the less attractive the project becomes as it implies reduced profitability.The earlier the cash flows from a potential project can offset the initial investment, the greater the likelihood that the company or investor will proceed with pursuing the project.Perhaps the simplest method for evaluating the feasibility of undertaking a potential investment or project, the payback period is a fundamental capital budgeting tool in corporate finance.Ĭonceptually, the metric can be viewed as the amount of time between the date of the initial investment (i.e., project cost) and the date when the break-even point has been reached, which is when the amount of revenue produced by the project is equal to the associated costs. How to Calculate Payback Period (Step-by-Step)

Break even point formula in dollars per period