Financial Management: Principles and Applications, 13/e

13.3 Break-Even Analysis

Although the tools of risk analysis discussed in the previous section provide us with an understanding of the different possible outcomes, it is also useful for a firm to know the least-favorable scenarios in which the project still breaks even. Because the increase in sales that can be generated by an investment is one of the most critical value drivers, managers typically do a break-even analysis to determine the minimum level of output or sales that the firm must achieve in order to avoid losing money—that is, to break even. In most cases, we define the break-even sales estimate as the level of sales at which net operating income (NOI) equals zero.

To illustrate break-even analysis, we refer back to the Longhorn Enterprises ...