Concepts and Problem Types
Break-Even Problems
MNTC 409 - Mineral Economics
Doug Macaulay
Learning Outcomes
This video will assist you in
achieving the following Learning
Outcome(s) for this week:
• Select the appropriate type of
information and concepts, and
use them to solve set problems
of a variety of types [CLO 3, 4, 6]
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
Key topics
• Description of break-even problems
• typical situations
• Information needed
• types of cost and other items
• Time value of money
• time value factors
• Worked example
• Other considerations
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
Description of break-even problems
• Break-even point: “The point where total revenue received equals
total costs associated with the output”
• Break-even analysis: “The process of varying a parameter of a
problem and determining what parameter value causes the
performance measure to reach some threshold or “break-even”
value”
Quotes from: Glossary in “Engineering Economics – Fourth Custom Edition for Queen’s University”. Pearson Learning Solutions (729)
Description of break-even problems
Typical situations
• Production level break-even
• at what rate of production does a process or plant break
even?
• Service life break-even
• what life must a new piece of equipment have for its
equivalent annual cost to break even with an old piece?
Information needed
Types of cost information
• Fixed and variable costs
$ nu
e
ve
Re
l co sts
Tota Fixed costs
Capacity
Diagram from: “Mine Investment Analysis” by Dr. Donald W. Gentry and Dr. Thomas J. O’Neil. Society of Mining Engineers (SME) of AIME (1984) (18)
Information needed
Types of cost information
• Fixed and variable costs
• given two points on a linear total cost curve, may need to
calculate variable cost per unit output and fixed cost
$ nu
e
ve
Re 1st: CV = (C2-C1) $ per unit output
C2 (P2-P1)
l co sts
C1 Tota Fixed costs
Then: C2 = CV (P2) + CF
or … solve
for CF
C1 = CV (P1) + CF
P1 P2
Capacity
Diagram from: “Mine Investment Analysis” by Dr. Donald W. Gentry and Dr. Thomas J. O’Neil. Society of Mining Engineers (SME) of AIME (1984) (18)
Information needed
Types of cost information
• Fixed and variable costs
• given two points on a linear total cost curve, may need to
calculate variable cost per unit output and fixed cost
• Revenues – for production level break-even problems
• Taxes – many break-even problems are based in before-tax
situations
Information needed
Other items
• Equivalent annual cost
• derived from cost information provided / collected
• may be of use when determining whether break-even
point falls within service life of equipment
• Timeframe of decision
• may affect what costs are fixed vs variable
• Differential costs
• may be able to exclude costs common to current and
proposed scenarios in a service life break-even problem
Time value of money
Time value factors
• [A/P, i, n]
• calculate A equivalent to PV investment in service capacity
Worked example
Service life required to justify consideration of automation?
• An investment in automating part of a process will result in lowering of labour
costs per year in a mineral processing plant
• Will service life breakeven point be achieved within life of automation equipment?
• Input data provided:
Investment required $4.0 million
Life of automation equipment 6 years
Labour costs avoided by investment $1.0 million per year
Other costs Same for current and automation
Effective tax rate 36.5%
Worked example
Other information provided
• Revenue is not provided, nor needed to solve this problem
• Discount rate of 10% is given; based on the fact that the company has
other potential investments that it estimates would result in a 10% return
• Finance team is investigating whether automation equipment would
qualify for higher depreciation rate for tax purposes
• tax impact
• is not material to the service life break-even problem
• may be needed to compare automation project to alternative(s)
Worked example
Solution
• Step 1 – type of DCF problem = service life break-even problem
Worked example
Solution
• Step 2 – cash flow diagram
Annual labour cost
avoided $1 million
1 2 3 4 5 6 7
Investment in automation $4 million
Worked example
Solution
• Step 3 – assess information
• have the cost information required, based on ‘other costs equal’
• discount rate reflects opportunity cost of an investment in
automation precluding other alternatives
• effective tax rate is not relevant and should be disregarded
Worked example
Solution
• Step 4 – DCF calculations needed Life of
automation
equipment
[A/P, 10, n]
Worked example
Solution
• Step 4 – DCF calculations needed Life of
automation
equipment
[A/P, 10, n]
Worked example
Solution
• Step 4 – DCF calculations needed Life of
automation
equipment
Service life break-even?
[A/P, 10, n]
Worked example
Solution
• Step 5 – generate needed time value factors
• $4 million * [A/P, 10, n] = $1 million
[A/P, 10, n] = $1 million
$4 million
= 0.2500
Worked example
Solution
• Step 6 – perform calculations
• using time value factor table
• enter 10 in cell C6
Worked example
Solution
• Step 6 – perform calculations
• using time value factor table
• enter 10 in cell C6 .. then .. look for b/e value of [A/P, 10, n]
Worked example
Solution
• Step 6 – perform calculations
• interpolate to calculate service life break-even point (x)
x–5 = 6–5
0.2500 – 0.2638 0.2296 – 0.2638
x–5 = 6–5
-0.0138 -0.0342
x–5 = 1 * (-0.0138)
-0.0342
x = 5 + 0.4035 = 5.4 years
Worked example
Solution
• Step 6 – perform calculations
• interpolate to calculate service life break-even point (x)
x–5 = 6–5
0.2500 – 0.2638 0.2296 – 0.2638
x–5 = 6–5
-0.0138 -0.0342
x–5 = 1 * (-0.0138)
-0.0342
x = 5 + 0.4035 = 5.4 years
Worked example
Additional observations
• Interpolation assumes linear relationship between time value factor
and n
• Result is a ‘snap shot’ measure of time required to break even on an
investment
Other considerations
• Balancing economic benefits of automation with employment impacts
• “Early indications are that high technology mining has the potential
to act as a significant disruptor to the gains that have been made in
Indigenous mining employment” (1)
• upskilling for new types of jobs; new types of Indigenous
engagement (land management, land rehabilitation)
(1) From: “Indigenous Employment Futures in an Automated Mining Industry: An Issues Paper and a Case for Research” by Dr. Sarah Holcombe and Professor
Deanna Kemp, Center for Social Responsibility in Mining (CSRM), Sustainable Minerals Institute, The University of Queensland, Australia (2018) (17)
Summary
• Break-even problems
• production level
• service life
• Higher level ‘snapshot’
• Using time value factors ‘in
reverse’
• Externality for a problem
may not be for the company
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
