Properties of the Financial Break-Even Point in a Simple Investment Project As a Function of the Discount Rate

Tarzia, Domingo A.

doi:10.18533/jefs.v4i02.226

Cited by 2 publications

(10 citation statements)

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“…Principles of the decision theory in conditions of uncertainty and dynamic version of the breakeven analysis of project production [3,[8][9][10] have formed a methodological basis for the development of a new integrated approach to assessing the financial risk of projects. Assessment of the financial stability margin of the project is an integral part of the new approach.…”

Section: The Study Materials and Methodsmentioning

confidence: 99%

“…Study [7] presents fundamental concepts of risk analysis based on recent studies (concepts, theories, frameworks, approaches, principles, methods, models, risk assessment). The behavior of the breakeven point of an investment project depending on the discount rate is studied in [8] with the help of sensitivity analysis. Instead of the breakeven point, it would be more useful to study the point of acceptability when the project has not zero profitability but profitability acceptable for the investor.…”

Section: Literature Review and Problem Statementmentioning

confidence: 99%

“…Let the flow of net incomes from the IP operation form a simple constant annuity postnumerando with payments having a structure of the form [3,8,10]:…”

Section: Assessment Of the Risk Of Unacceptably Low Profitability Of ...mentioning

confidence: 99%

“…where Q is for the volume of production (sales) of homogeneous products for 1 IP period; c is for price per product unit; v is for specific variable production costs; FC is for total fixed production costs for 1 IP period; dep is for depreciation deductions for 1 IP period; τ is for the income tax; t is for the number of the current IP time period; n is for the quantity of IP periods; t n = 1, . Then, to calculate values of the NPV index of the project with a zero residual value of equipment, the formula from [3,8,10] can be applied:…”

Section: Assessment Of the Risk Of Unacceptably Low Profitability Of ...mentioning

confidence: 99%

“…With a one-time finding of acceptability points, the choice of the method for their calculation is of no fundamental importance. However, if it is required to find these points repeatedly in a computer program that implements the scenario method or the Monte Carlo method, then, in this case, it is much easier to program explicit formulas (8) to (11) than a resort to the software package each time. Now it is possible to define concepts of investment acceptability margin of the project.…”

Section: Assessment Of the Risk Of Unacceptably Low Profitability Of ...mentioning

confidence: 99%

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Development of a systems approach to assessment of investment project risks: risks of unacceptably low project profitability

Vasiliev

Vasilieva

Tupko

2022

EEJET

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A new systems approach to quantitative estimation of financial risks of investment projects was proposed: an integral risk of the project as a whole for all its parameters at once and the risks for each of its parameters separately. At the same time, the very concept of the project risk has been generalized: instead of the conventional risk of unprofitability, a new, more general concept of the risk of unacceptably low project profitability has been introduced. Two levels of the project profitability were considered: a level acceptable to the investor and a realistically achievable level. Corresponding values of design parameters and indices of financial efficiency of the project were found for these levels. Based on the found values, relative margins of investment acceptability and risks of unacceptably low profitability of the project were calculated. A procedure of comprehensive assessment of the risk of unacceptable low profitability of the project for cases of high certainty and partial uncertainty has been developed. Explicit formulas for quantitative risk assessment of unacceptably low profitability of the project have been derived, ranges of values of all risks under consideration have been determined and appropriate recommendations have been given. Explicit formulas for calculating the values of project risks and dynamic points of project acceptability are convenient and useful for software implementation (for example, within the Monte Carlo method). For the Monte Carlo method and the method of scenarios, another alternative approach to assessing the integral risk of unacceptably low project profitability was proposed by the authors based on the direct calculation of unacceptable scenario values of any criterion of the project financial efficiency. A new index of financial efficiency of the project has also been introduced: a discounted period of acceptable return (discounted payback period of the project is its special case).

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Section: The Study Materials and Methodsmentioning

confidence: 99%

Section: Literature Review and Problem Statementmentioning

confidence: 99%

“…Let the flow of net incomes from the IP operation form a simple constant annuity postnumerando with payments having a structure of the form [3,8,10]:…”

Section: Assessment Of the Risk Of Unacceptably Low Profitability Of ...mentioning

confidence: 99%

Section: Assessment Of the Risk Of Unacceptably Low Profitability Of ...mentioning

confidence: 99%

Section: Assessment Of the Risk Of Unacceptably Low Profitability Of ...mentioning

confidence: 99%

See 3 more Smart Citations

Development of a systems approach to assessment of investment project risks: risks of unacceptably low project profitability

Vasiliev

Vasilieva

Tupko

2022

EEJET

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Criteria for Financial Acceptability of an Investment Project

A.,

N.,

2024

Naukovij vìsnik Hersonsʹkogo deržavnogo unìversitetu. Serìâ Eko

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Н itability to the minimum of investor requirements. For this, the values of discounted indicators of financial efficiency of the investment project NPV (Net Present Value) and PI (Profitability Index) should be compared not with break-even values, but with the lower limit of profitability acceptable to the investor. Instead of two other main indicators of the financial efficiency of the project -IRR (Internal Rate of Return) and DPP (Discounted Payback Period) -the authors propose to use new, more general indicators of financial project's acceptability -IRAR (Internal Rate of Acceptable Return) and DPAR (Discounted Period of Acceptable Return). For the break-even level of project's profitability, the values of the new and traditional indicators are the same, that is: IRAR = IRR, DPAR = DPP. Since the criteria for financial project`s acceptability are formulated for a situation of uncertainty, then the mathematical expectations of the values of the corresponding indicators are considered. The application of the proposed criteria for the financial acceptability of the project is illustrated with a specific example.As an example, an investment project with a rental flow of payments and three scenarios of possible development is considered. For this project, an analysis of its financial acceptability when setting different levels of project's profitability. In a situation of partial uncertainty, decisions on the implementation of a any investment project are made taking into account two factors: the profitability of the project and its risk. Therefore, in addition to indicators of the financial acceptability of the project, the article also considered indicators of the risk of unacceptably low profitability of the project. For the example under consideration, the values of these risk indicators were obtained using the scenario method and the Monte Carlo method.Keywords: criteria of financial efficiency of the project, levels of profitability of the investment project, analysis of financial acceptability of the project, risk of unacceptable project profitability, methods of scenarios and Monte Carlo.

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Properties of the Financial Break-Even Point in a Simple Investment Project As a Function of the Discount Rate

Abstract: ff Q Q r g vs r has, for all 0 g  , the same asymptotic straight line when r  as in the particular case with g=0.

Cited by 2 publications

References 40 publications

Development of a systems approach to assessment of investment project risks: risks of unacceptably low project profitability

Development of a systems approach to assessment of investment project risks: risks of unacceptably low project profitability

Criteria for Financial Acceptability of an Investment Project

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