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Wize University Introduction to Finance Textbook > Cash Flow Estimation

The Initial Cash Outlay

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The Initial Cash Flow

The initial cash outflow/outlay required to start a project or investment, includes Net Working Capital Cost invested and Opportunity Costs.

Capital Cost

  • This refers to all the costs that were incurred in order to make an investment operational.
  • Includes machinery, installation expenses, and so on. These costs can be depreciated for tax purposes (CCA).

Net Working Capital
  • Includes any change to current assets and/or current liabilities at the start of the project.
  • Increases in NWC are outflows of cash and increase the initial cost of the project.
  • Decreases in NWC are inflows of cash and decrease the initial cost of the project.

Opportunity Cost (OC)
  • Possible income given up by undertaking the project.
  • Typically the result of not being able to sell an existing asset if the project is started.

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Example: Initial Cash Flow (CF0)

Wize Corporation is planning the construction of a new building in Austin, Texas. The cost of the building is $1,000,000. Licensing and municipal taxes on the new building are expected to be $10,000. The building will be built on a plot of land the company purchased five years ago for $120,000, the land's current market value is $250,000. Once the building begins being used, additional inventory of $20,000 will be acquired. The building will be used for 5 years, after which the company plans on selling it for $2,200,000.

What is the initial cash flow?

Practice: Initial Cash Flow (CF0)

ABC Inc. is considering a new 5-year project.
  • The project requires the purchase of a new machine costing $600,000, delivery of the machine is expected to cost $50,000, and the opportunity cost of the project is $30,000.
  • The research cost associated with the project is $15,000.
  • The machine has a useful life of 5 years and a $75,000 salvage value. Assets are depreciated using the straight-line method.
  • Management believes that sales will increase by $300,000 and related expenses are expected to be $80,000 per year.
  • Inventory will increase immediately by $15,000 and no additional working capital is required, inventory will no longer be needed at the end of the project.
  • The cost of capital is 12% and the marginal tax rate is 30%.
Compute the initial cash flow.
Round your final answer to the nearest whole dollar.
The initial cash flow is$
Extra Practice
La Poutine Cheese Products Inc. is considering a project that requires an initial cash outlay of $290,000, made up of $235,000 for the purchase of new equipment, $13,000 for the installation costs, and $42,000 for additional inventory. In addition, the R&D associated with the project was $5,000 and its opportunity costs are $28,000. What is the capital cost associated with the investment opportunity?
You are given the following information on a project:
initial capital cost = $500,000
installation costs associated with the capital asset = $25,000
You are given the following information on a project:
initial capital cost = $500,000
installation costs associated with the capital asset = $25,000
The Vancouver Transportation Company is considering a project, which requires the purchase of a fleet of trucks costing $500,000. It will need to spend $65,000 to modify the trucks before they can be put into operation. The associated opportunity costs are $35,000. In addition, the company will need to spend $10,000 on additional spare parts inventory. What is the initial capital cost associated with the investment opportunity?
Toronto Moon Printing is looking at an opportunity of setting up a new production facility, which requires the purchase of a new printing press that costs $1 million. The costs to install the machine are $60,000. The new facility is to be built on a piece of land that the company bought for $150,000 five years ago. The market value of the land is $250,000. The R&D costs associated with the investment opportunity were $50,000. In addition, the company will need to purchase $40,000 additional inventory for the project use. How much of these costs can be categorized as a sunk cost?
What is the difference between the initial cash flow and the purchase price of an asset?
Which of the following is NOT a component of the initial cash flow of a capital investment analysis?