Break Even, Time to Value, IRR, What do all these things mean?!?

J

Josh Rogers

I'm having trouble searching for this, because I am not sure what to
call it. What I have is two different solutions that will cost me
money. One of them has a higher cost up front, but a lower monthly
cost, and the other has a lower cost up front, but higher monthly cost.


What I'm interested in knowing is what the break even point is. Where
do they intersect. If I choose the initially more costly solution, how
many months (days, years, whatever) must I use it before it is a better
overall choice over the other?

For example.

Solution A costs $60/month, and $368 up front.
Solution B costs $68/month and $69 up front.

How many months must I use solution A before I'm saving money over
Solution B?
 
V

vandenberg p

Hello:

Assuming that you want to consider the time value of money the answer
depends upon the discount rate. Let's assume that is 10% annually,
compounded monthy a rate of 0.008333333 per month.

Take the incremental flow which is a savings of $299 in period 0
and a loss of $-8 each month. Use the NPER function.

=NPER(0.008333333,-8,299) You can enter the data in cells and use
the cell address in NPER function. The answer I get is 44.967865
months.

You can test sensistivity to interest rates. As rates go down the
months become less and vice-versa.

You can test the result by:

=PV(0.008333333,-60,44.967865)+368
=PV(0.008333333,-68,44.967865)+69

These two will produce the same value.

Pieter Vandenberg

: I'm having trouble searching for this, because I am not sure what to
: call it. What I have is two different solutions that will cost me
: money. One of them has a higher cost up front, but a lower monthly
: cost, and the other has a lower cost up front, but higher monthly cost.


: What I'm interested in knowing is what the break even point is. Where
: do they intersect. If I choose the initially more costly solution, how
: many months (days, years, whatever) must I use it before it is a better
: overall choice over the other?

: For example.

: Solution A costs $60/month, and $368 up front.
: Solution B costs $68/month and $69 up front.

: How many months must I use solution A before I'm saving money over
: Solution B?
 
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