Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

IV. Capital Budgeting 11. Project Analysis and

Evaluation

(^390) © The McGraw−Hill
Companies, 2002
P Selling price per unit
v Variable cost per unit
Q Total units sold
S Total sales PQ
VCTotal variable costs vQ
FCFixed costs
D Depreciation
T Tax rate
Project net income is given by:
Net income (Sales
Variable costs
Fixed costs
Depreciation) (1
T)
(S
VC
FC
D) (1
T)
From here, it is not difficult to calculate the break-even point. If we set this net income
equal to zero, we get:
Net income 
SET
0 (S
VC
FC
D) (1
T)
Divide both sides by (1
T) to get:
S
VC
FC
D 0
CHAPTER 11 Project Analysis and Evaluation 361

FIGURE 11.4

Sales

and

costs ($)

4,500

2,250

Quantity

of output

(sales volume)

900

0

100

Net income < 0

Net income > 0

Total costs

= $900 + $3/unit

Revenues

= $5/unit

200 300 400 500 600 700 800 900

Accounting Break-Even