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Initial investment is the net cash outlay in the period in which an asset is purchased. A major element of the initial investment is gross outlay or original value (OV) of the asset, which comprises its cost including cost of accessories & spare parts and freight and installation charges.
Initial investment is the amount required to start a business or a project. It is also called initial investment outlay or simply initial outlay. Capital budgeting decisions involve careful estimation of the initial investment outlay and future cash flows of a project. Correct estimation of these inputs helps in taking decisions that increase shareholders wealth.
Initial investment equals the amount needed for capital expenditures, such as machinery, tools, shipment and installation, etc.; plus any increase in working capital, minus any after tax cash flows from disposal of any old assets. Sunk costs are ignored because they are irrelevant.
Initial Investment = Capital Expenditures + Increase in Working Capital − Disposal Inflows
Book Value
Original value of an asset is included in the exiting block of assets for computing annual depreciation. Original value minus depreciation is the asset’s book value (BV).
