All 34 Capital Budgeting questions
More in Capital Budgeting
What is the payback period and how is it calculated? What is the accounting rate of return (ARR)? What is the profitability index (PI)? What is the difference between capital and revenue expenditure in budgeting? What are the advantages and disadvantages of the payback method? What is a hurdle rate? What is the difference between mutually exclusive and independent projects? What is the difference between a screening and a preference decision? What is the time value of money and why does it matter in capital budgeting? What is Net Present Value (NPV) and how do you interpret it?
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Budgeting & Forecasting › Capital Budgeting

Why is the initial investment treated as a time-zero cash outflow?

Beginner

Answer

The initial outlay is usually paid at the start of the project (time 0), so it's not discounted (its present value equals its face value) and is deducted from the present value of future inflows to get NPV. Treating it at time 0 correctly reflects that the cash leaves immediately.
NPV = PV of inflows - Initial outlay (undiscounted, at time 0).
Real-world example The upfront machine cost is subtracted at full value from the discounted future benefits.

Common follow-ups: Is the initial outlay discounted? | Where does it sit in the NPV calculation?

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All 34 Capital Budgeting questions