It refers to the amount that a company requires for making a new investment. This new investment can be for any purpose, such as adding a new product line, taking up a new project, establishing more outlets, etc. The initial outlay calculator will help you calculate the amount of such investments.
In order to calculate initial outlay or initial cash outflows, consider the following steps:
- Add all the capital expenditures necessary to incur for the purpose of such investment.
- Calculate the increase or decrease in the working capital resulting from such investment. And Margin Money for working capital for a fresh project.
- Deduct the value realized from selling any old asset, if any.
- Add the tax payment, if any, made for capital gain on selling the old asset, if any.
The resultant figure will be the initial outlay or amount required initially for making the investment.
An equation to summarize the above steps is as follows:
Initial Outlay = Total Capital Expenditures + Change in Working Capital – Sales of Old Asset (if any) + Tax on Profit from Sale of Old Asset (if any)
How to Calculate using Calculator?
Enter the following figures into the initial outlay calculator to simply arrive at the amount of initial investment.
Total Capital Expenditure
Enter the amount required for creating or purchasing those capital assets. Such investment is the need by the company to execute the planned projects. Continuing with the above example, to begin the manufacturing of new product X, the company would require two new machines, Y and Z. The amount to be spent by the company on both the machines to bring them into working status will constitute its capital expenditure.
Change in Working Capital
Any increase in working capital means more funds to be invested in it. Hence, the initial outlay increases. While any decrease in working capital means the company can free up such decreased cash resources from working capital. And this is already available with the company. Hence the same needs to be deducted in order to calculate the amount required for the initial investment. For a new company, it is the quantum of working capital margin that needs to be added to know the total initial outlay.
Realization from Sale of Old Asset
Any amount realized from selling an old asset reduces the amount of initial investment. Assume that machine Z required by the company is already there with the company. But it might have depreciated to its full capacity due to continuous wear and tear. In this case, the company will sell the old machine and buy a new one. Hence, such an amount from selling the old machine will get invested back in buying a new machine, and its cost gets reduced by such amount for the company.
Tax on Profit from Sale of Old Asset
If the company earns any profit by selling such an old asset, then the company usually needs to pay taxes on capital gains so earned. This amount increases the requirement of investment, as the cash flow from sales will stand reduced to that extent. Hence the amount of tax payable is added to the calculation. And, if the company incurs a loss by selling such an asset, the tax amount on such loss will get deducted from the calculation as the company will get tax relief of that much amount. For this, we simply have to enter the book value and tax rate. The initial outlay calculator will itself calculate the tax payment and will adjust the final amount accordingly.
Suppose a company Alpha is planning to set up its two new outlets in two different cities – Say, City A & City B. The company will require investment in furniture worth $80,000 in each City. And the remaining capital expenditure (excluding investment in furniture) is $450,000 in city A and $270,000 in city B. Further, the company is planning to sell one of its old buildings for $220,000 (book value of $210,000). The requirement of working capital will increase by $40,000. And the tax rate on capital gain is 30%.
Initial Outlay = 880,000 + 40,000 -220,000 + 3000 = 703,000
Where total capital expenditure will be:
|Investment in furniture||160,000 (i.e., 80,000*2)|
|In city A||450,000|
|In city B||270,000|
Tax on profit of sale of building:
Profit = 220,000 – 210,000 = 10,000
Tax = 10,000*30% = 3,000