Breakeven Point

Question

Is the breakeven point calculated correctly?

This is the citation from the expected answer:

Short time frame until breakeven point, with less than 4 years (total investment: 1,68m €; annual profit: 424k €)

The used annual profit is including the depreciation. When using 704k € (750k € electricity margin - 46k € annual fixed cost) instead, the amortization duration is 2,39 years.

Should I use annual profit with or without depreciation?

Answer 1

Hey there :)

For a breakeven or payback period calculation, you normally use cash flow, not accounting profit. Depreciation is a non-cash expense, so it should not reduce the amount available to “pay back” the initial investment. That means you should calculate with the profit before depreciation (in your case 704k €), which gives you the 2.39 years.

If you include depreciation, you’re mixing in an accounting perspective, which is more relevant for ROI or net income analysis, not for breakeven/payback.

So: for breakeven → without depreciation.

best, Alessa :)

Answer 2

Hi Niklas,

I would use annual profit without depreciation (704k €) for payback period calculation.

Reasoning: Payback period measures time to recover actual cash investment. Depreciation is a non-cash accounting allocation of the same initial investment - including it double-counts the investment cost.

From my POV the cited 4-year figure incorrectly includes depreciation, artificially inflating the payback period.

Best,
Lukas

Answer 3

Hi there,

For a breakeven calculation, you should use profit before depreciation — meaning exclude depreciation from costs. Depreciation is a non-cash expense, while breakeven analysis is about how long it takes to recover the actual cash investment.

If you use profit including depreciation, you’ll overestimate the breakeven period, since you’re deducting a non-cash charge.
If you use profit before depreciation, you get a more accurate view of the payback period, which is why the 2.39 years (using €704k) is the correct calculation.

Best,

Evelina

Answer 4

Hi Niklas,

When you calculate the breakeven or payback period, what matters is cash actually coming in and out, not accounting numbers that include depreciation. Depreciation is only a book entry and does not affect how quickly you recover the initial investment. In your case, you should therefore use the 704k € figure, because it represents the real cash flow available to pay back the 1.68m € investment. With that, the payback time is about 2.4 years.

Example
Imagine you buy a machine for 100k €. Each year the machine generates 30k € in net cash. On the books, you also record 10k € of depreciation per year.

If you use profit including depreciation (30k – 10k = 20k), you would think it takes 5 years to pay back.
If you use actual cash (30k), the real payback is 3.3 years.

That is why for breakeven or payback analysis you always use the version without depreciation.