Calculating the Net Investment (NINV) or Initial Outlay (IO)
Net Investment and Initial Outlay are two names for the same concept. This is the cost of entering into a project. Different textbooks will typically use one or the other of these two phrases. These notes use the Net Investment terminology.
The following worksheet summarizes the major calculations associated with the Net Investment calculation. Note that the outlays are first calculated as a positive value then are subtracted from the present value of the discounted cash flows from the project in the NPV calculation.
Calculating the Net Investment ( Initial Outlay):
STEP 1 - Calculate Explicit Initial Outlays
+ Cost
+ Shipping & Insurance
+ Installation related costs
+ Any required training fees or books and manuals for new equipment
+ Any taxes and fees
+ Any other required outlays
STEP 2 - Calculate Changes in Working Capital
(Note: working capital is an investment. A rise in the average amount invested in a working capital account requires an outlay of cash.)
+ Increases in accounts receivables
- Decreases in accounts receivables
+ Increases in inventory
- Decreases in inventory
+ Increases in cash balances
- Decreases in cash balances
STEP 3 -
Salvage Value (Market Value of old equipment if a replacement decision)
- subtract positive salvage value
+ add additional removal costs (negative salvage value)
STEP 4 -
Tax Implications if replacement decision
- LOSS * ( TAX RATE)
Tax
benefit inflows
+ GAIN * (TAX RATE)
Tax expense outlays
Note: If
BV = MV no tax adjustment
STEP 5 - Calculate any available tax credits associate with the investment
(Note: in some tax environments there exists tax credits that lower the cost of investments)
- Investment
tax credits
Subtract
from Net Investment
- Solar Energy and other Energy Related Tax Credits
Subtract
from Net Investment
STEP 6 - Final Number Equals Net Investment (Initial Outlay) for use in DCF decision models.