About investment Analysis

Break-Even method of Investment Analysis:

The following points must be kept in mind while one is studying the break-even method of investment analysis.

1. A break even point is that point wherein the investment in question will result in a return that has positive outcomes.
2. Fixed Costs do not change if the volume of output changes
3. Variable costs are directly related to the volume of output
4. Total Fixed Costs do not change if the volume of output changes.

When one talks about investment analysis, the break even method is extremely useful as it establishes the connection between variable costs, fixed costs and returns of the investment in question. The break even point if that point wherein the investment will provide the investor with a positive result. This break-even point can be established with the help of a graph. Break-even analysis helps investors to understand the cost that must be incurred for the purpose of covering the above mentioned costs.

Fixed costs are those that are not directly related to the volume of output and do not increase of decrease if the volume of output increases or decreases. When talking about investment analysis, fixed costs include interest costs, overhead costs as well as costs related to depreciation and the like. When these fixed costs are added up, they result in Total Fixed Cost.

Variable costs are those that increase or decrease when the volume of output increases or decreases. Therefore, they are directly related to the volume of output. When talking about investment analysis, variable costs include costs incurred on labor, fuel and other expenses that are incurred during the day-to-day functioning of an organization. When these variable costs are added up, they result in Total Variable Cot. Average variable costs are computed by dividing the TVC by the number of units with relation to the output.

When talking about investment analysis, especially break even analysis, the advantages and disadvantages of the method must be kept in mind:

Benefits:

1. It does not require the investor spending too much money. Even so, the investor is able to gain a broader perspective with reference to his fixed costs, returns and variable costs. He is able to realize his profits and losses at every level of output without making too much of an effort.
2. It shows the health of the business with the help of a single graph or a mathematical calculation. When talking about investment analysis, this method is important as a business that is just starting out is required to present this graph to a bank if it needs to get a loan.

Disadvantages:

1. This method of investment analysis makes an assumption: It assumes that the entire volume of output will be sold eventually. However, more often than not, each and every unit of the output is not sold and there remains and excess. Therefore, when talking about investment analysis, this limitation must be kept in mind.
2. Another assumption made by this method of investment analysis is that the business will sell every unit of output produced at the same price.

When going about investment analysis, one must be cautious.