1 – Calculating the Break Even point for a company… Assume the company spends $250,000 in early 2016 for Plant Improvements. If they expect to get an additional $50,000 increase in Net Income from this investment each year starting at the end of 2018 at what point would they break even on their investment for plant improvements – provide the year? (note – this is 50,000 per year not 50,000 then 100,000 etc.)
2 – Using the same information for exercise 1 and assuming we are doing a long range forecast what would the Return-On-Investment be at the end of 2023? (show the number as a %)
answer :
We have been provided with the information that,
company spends $250,000 in early 2016 for Plant Improvements.
they expect to get an additional $50,000 increase in Net Income from this investment each year starting at the end of 2018
so investment and cash inflow are as under
| Year | Cash Flow |
Incremental Cash Flow |
| 2016 | -250,000 | -250,000 |
| 2017 | 0 | -250,000 |
| 2018 | 50,000 | -200,000 |
| 2019 | 50,000 | -150,000 |
| 2020 | 50,000 | -100,000 |
| 2021 | 50,000 | -50,000 |
| 2022 | 50,000 | 0 |
| 2023 | 50,000 | 50,000 |
From the above calculation we can see that Break Even year is year 2022
2
Using the same information for exercise 1 and assuming we are doing a long range forecast what would the Return-On-Investment be at the end of 2023? (show the number as a %)
Return on Investment = Increase in net income / Investment
=50,000 / 250,000
=0.20 or 20%
