In the present-value break-even the EAC is used to:
A) determine the opportunity cost of investment.
B) allocate depreciation over the life of the project.
C) allocate the initial investment at its opportunity cost over the life of the project.
D) determine the contribution margin to fixed costs.
E) None of these.

Question

Quizplus · Accepted Answer

The present-value break-even analysis aims to determine the minimum level of sales or the required selling price that the project must generate to cover all costs, including the initial investment at its opportunity cost. Therefore, the EAC (Equivalent Annual Cost) is used to allocate the total initial investment at its opportunity cost over the life of the project, considering the time value of money. By doing so, the present value of all costs can be computed, allowing for a comparison with the present value of all revenues to determine the break-even point. Choices A, B, D, and E are not directly related to the present-value break-even analysis.

In the Present-Value Break-Even the EAC Is Used To