Capital Budgeting

Ok, so quick question to get my head straight.

A lot of these formulas like the outlay of a replacement project = FCINV + NWCInv - Salvage + Tax (Salvage - book value).

When you actually do a question… the signs would be opposite right?

FCINV would be a negative, you add the salvage value, since you sell that and get it. In reality, you would want an initial outlay to be low, and not high (you want to spend less and not more).

Why are the formulas not written this way?


Yes: you tot up the outlay according to the formula, then enter it as a negative number: a cash outflow.

The formula is written to describe the outlay, which is a positive number. It’s no different than saying that you have to pay $5.00 for a cup of Starbuck’s; you don’t say that you have to pay -$5.00. But it’s understood that when you pay, the cash flow is negative.

hah, just spent three dollars something on a medium iced cafe americano at starbucks. going to be a long night. Thanks as always.