Initial investment

Definition

Initial investment is the upfront capital required to start a project or purchase an asset. It includes all costs necessary to make the asset operational and ready for use.

5 Must Know Facts For Your Next Test

1. Initial investment is typically a one-time expense incurred at the beginning of a project.
2. It is crucial for calculating the payback period and accounting rate of return.
3. Initial investment includes costs such as purchase price, installation fees, and initial training expenses.
4. Accurate estimation of initial investment ensures effective capital budgeting decisions.
5. Depreciation and salvage value are not part of the initial investment but are important for subsequent financial analysis.

Review Questions

• What components are included in the calculation of initial investment?
• Why is accurate estimation of initial investment important in capital budgeting?
• How does initial investment affect the calculation of the payback period?

Related terms

Payback Period:

The time it takes for an investment to generate enough cash flow to recover its initial cost.

Accounting Rate of Return (ARR):

A financial metric that measures the expected annual profit from an investment as a percentage of the initial cost.

Capital Budgeting:

The process of planning and managing a company's long-term investments in projects and assets.