Calculation of the Initial Investment Outlay

We can use the following formula to calculate the initial investment outlay:

\[Initial~outlay~=~Capital~expenditure~+~Change~in~the~working~capital~–~Sale~of~the~old~assets~Profit~from~the~sale~of~the~asset*~\left( Tax~rate \right)\]

Let us understand initial investment outlay in detail:

1
2
3
4

All the costs incurred during the initial stages of starting a project/business have to be measured to calculate the break-even point, profitability, or margin of safety. The investment or expansion of a project depends on the cost of items to be purchased initially. Examples are the cost of the equipment, shipping cost, fees, and installation costs. This is called capital expenditure.

Then, the change in the working capital is added to the capital expenditure. For example, a firm needs to modify the accounts receivable and payable because of launching the project. Also, a firm may need to adjust inventory for raw materials because of the project.

Then, the salvage value (if there is any) for the old equipment has to be calculated. This will add some investment to the new project.

After that, the profit from the sale of such assets has to be added after excluding the tax amount on such profits.