Besides NPV, other methods seek to incorporate risk into the capital budgeting decision. The break-even point is where the total contribution margin exactly equals the total fixed cost of producing a product or service. The contribution margin is the difference between revenue and variable costs. The actual point of indifference is the level of sales at which the NPV from selling or abandoning the project is zero. One way to get a feel for how much operating leverage a project has is to examine the sensitivity of its NPV to variations in sales.
All outcomes result from following a path along what looks like the branch of a tree.
In most cases, the possible outcomes of a fork of a decision tree are called subjective probabilities. The model relies on random sampling from probability distributions of outcomes. Define the terms erosion and enhancement as they are related to the firm's capital investment decisions. Erosion occurs when the introduction of a product innovation decreases the profitability of one or more existing products, and enhancement occurs when the introduction of a product innovation increases the profitability of one or more existing products. Potential erosion and enhancement of existing products must be considered when evaluating a potential investment project.