To calculate the initial investment outlay, take the cost of new equipment for the project plus operating expenses such as supplies. Subtract the value of any old equipment you sell off, then add any capital gains tax or loss you make on the sale. That gives you your outlay.

What is the payback period for a project with an initial investment of $180000 that provides an annual cash inflow of $40000 for the first three years and $25000 per year for years four and five and $50000 per year for years six through eight?

Answer: It will take 5.2 years to cover the initial investment.

What is the initial investment called?

Initial investment is the amount required to start a business or a project. It is also called initial investment outlay or simply initial outlay. It equals capital expenditures plus working capital requirement plus after-tax proceeds from assets disposed off or available for use elsewhere.

What does initial investment include?

Initial investment equals capital expenditures or fixed capital investment (such as machinery, tools, shipment and installation, more) plus a change in working capital, minus proceed from the sale old asset, plus tax adjusted profit or loss from the sale of assets.

Under what condition would you not accept a project that has a positive net present value?

Under what condition would you not accept a project that has a positive net present value? If the firm is limited in the capital it has available (capital rationing).

What is the NPV method?

Net present value (NPV) is a method used to determine the current value of all future cash flows generated by a project, including the initial capital investment. It is widely used in capital budgeting to establish which projects are likely to turn the greatest profit.

Do you need cost of capital to calculate profitability index?

The profitability index requires an estimate of the cost of capital to calculate. In mutually exclusive projects where the initial investments are different, it may not indicate the correct decision. Thank you for reading this CFI guide.

What happens if the pI of a project is less than 1?

If the PI is greater than 1, the project generates value and the company may want to proceed with the project. If the PI is less than 1, the project destroys value and the company should not proceed with the project.

Which is an example of a cash inflow?

Example: Year Annual cash inflows Cumulative Annual cash inflows Payback period 1 80,000 80,000 2 60,000 1,40,000 (80,000+60,000) 3 60,000 2,00,000 (1,40,000+60,000) In this Year 3 we got initial investment 4 20,000 2,20,000 (2,00,000+20,000)