FREE online courses on Capital Budgeting Analysis - Calculating the Discounted Cash Flows - Calculating Net Investment

 

Now that we have the current value of $ 22,709 for our cash flows, we need to compare this to our investment amount. Our investment is the total cash outlay we must make today and it includes:

 

All cash paid out to invest in the project and place it into service, such as installation, transportation, etc.

Net proceeds from the disposal of any old equipment that will be replaced by the new equipment.

 

Any taxes paid and/or tax benefits received from making the investment.

 

Example 9 -  Calculate Net Investment

 

We can calculate our Net Investment. We will also assume that an existing machine can be sold for $ 6,000.

 

Acquisition Costs                          $ 25,000

Installation Costs                              2,000

Increase in Working Capital                 1,000

Proceeds from Sale   $ 6,000

Less Taxes @ 35%      (2,100)

Net Proceeds from Sale                    (3,900)

Net Investment                            $ 24,100

 

So we now have a current value for our cash flows of $ 22,709 and a total net investment of $ 24,100. These amounts are derived by looking at three different types of cash flows:

 

Relevant cash flows during the life of the project.

Terminal cash flows at the end of the project.

Initial cash flows (net investment).