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

Here are several examples of breakeven time:

Solar panel installation for a farm. A farm invests $50,000 in solar panels to reduce electricity costs. The panels are expected to generate annual energy savings of $7,000, and using a discount rate of 5%, the present value of those savings equals the initial investment in about 8 years. Therefore, the breakeven time is 8 years, after which the investment begins to generate net positive returns.
Opening a new retail store. A company opens a new retail location with an initial investment of $250,000, including leasehold improvements and inventory. Based on projected discounted cash flows from store profits, the business expects to recover its investment in 4.5 years. The breakeven time is 4.5 years, meaning the project will start generating net value after that point.
Purchasing a CNC machine in a manufacturing plant. A manufacturer purchases a $100,000 CNC machine to improve production speed and reduce labor costs. The discounted cash flow savings from increased efficiency and reduced defects amount to approximately $20,000 per year, reaching the breakeven point in 5 years. After 5 years, the cost savings exceed the initial investment, making the machine a financially sound purchase.