Net Investment (NINV) - Financial Management

Ninv Formula

The net investment (NINV) in a project is defined as the project’s initial net cash outlay, that is, the outlay at time (period) 0. It is calculated using the following steps:

  1. The new project cost plus any installation and shipping costs associated with acquiring the asset and putting it into service
    PLUS
  2. Any increases in net working capital initially required as a result of the new investment
    MINUS
  3. The net proceeds from the sale of existing assets when the investment is a replacement decision
    PLUS or MINUS
  4. The taxes associated with the sale of the existing assets and/or the purchase of the new assets
    EQUALS
The net investment (NINV).

The calculation of the net investment for two example projects is illustrated in later sections of the chapter dealing with asset expansion and asset replacement projects. Also discussed are some of the tax consequences that can influence the net investment of a project. These tax effects are the treatment of gains and losses from asset sales in the case of replacement decisions.

If a project generates additional revenues and the company extends credit to its customers, an additional initial investment in accounts receivable is required.Moreover, if additional inventories are necessary to generate the increased revenues, then an additional initial investment in inventory is required, too. This increase in initial working capital—that is, cash, accounts receivable, and inventories —should be calculated net of any automatic increases in current liabilities, such as accounts payable or wages and taxes payable, that occur because of the project.

As a general rule, replacement projects require little or no net working capital increase. Expansion projects, on the other hand, normally require investments in additional net working capital.

Some projects require outlays over more than one year before positive cash inflows are generated. It may take several years to design and construct a new production facility, such as an automobile assembly plant. In these cases, the NINV for that project will be equal to the present value (at time 0) of this series of outlays, discounted at the firm’s cost of capital. For example, consider a project requiring outlays of $100,000 in year 0, $30,000 in year 1, and $20,000 in year 2, with a cost of capital equal to 10 percent. The NINV or present value of the cash outlays is calculated as follows:

present value of the cash outlays

Figure illustrates this concept.

Timeline of NINV for a Project with Multiple Period Outlays

Timeline of NINV for a Project with Multiple Period Outlays


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