Principles of Managerial Finance, 15th Edition

11.2 Finding the Initial Investment

1. LG3

2. LG4

The term initial investment as used here refers to the relevant, up-front net cash flow that managers should consider when evaluating a prospective investment opportunity. Our discussion of capital budgeting will focus on projects with initial investments that occur at time zero, the time at which a firm makes the capital expenditure. We calculate the initial investment by netting all of the incremental cash flows that occur at time zero: subtracting all the cash outflows occurring at time zero from all the cash inflows that occur at that time.

The basic format for determining the initial investment appears in Table 11.1. The cash flows that make up a project's initial investment include the installed ...