Question

Explain how each of the following inputs is uesd to calculate the initial investment: 1) cost of new asset, 2) installation costs, 3) proceeds from sale of old asset, 4) tax on sale of old asset, and 5) change in net working capital.

Answer 1

1) Cost of new asset is a base for initial investment, it is usually the biggest sum of investment needed
2) Installation cost is added to cost of equipment and increases initial investment
3) Proceeds from sale of old asset is usually deducted from amount of investments needed
4) Tax is additional cost that company has selling an asset
5) Change in net working capital if it for example caused by increase of inventories increases initial investments