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Breakeven Time

An important metric that emerges from a DCF calculation is the “breakeven time,” or the point in the lifecycle at which the project reaches “breakeven status.” This is the number of periods (e.g., months, quarters, or years) before the return from the new software, corrected for time, matches the costs expended to create it. In other words, it is the point at which the rolling NPV transitions from a negative value to a positive value. A project that has reached breakeven status is making real money for the business. We call this the “profit period.” The breakeven time thus marks the end of the payback period and the start of the profit period.

Before the dot-bomb era, breakeven times of five years were not atypical. In today's market however, software developments with a breakeven time of more than 12 to 18 months are rarely approved.

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