What is Breakeven Time?

Break even time is the amount of time required for the discounted cash flows generated by a project to equal its initial cost. A shorter time period indicates that a project has less risk of failure, and so would be a better investment. A possible risk when relying on this method is over-optimism in making aggressive cash flow predictions, so that the assumed breakeven time is shorter than turns out to actually be the case.

Example of Breakeven Time

For example, if it takes two years for a project to generate $1,000 on a discounted basis to offset its $1,000 startup cost, then the project’s breakeven time is two years.