CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A company is evaluating a new machine. It paid €40,000 last year for a feasibility study. The machine costs €500,000 and requires €30,000 of installation costs that are capitalized. Net working capital rises by €20,000 at the start. The initial outlay at time zero is closest to:
The initial outlay is about €550,000: the €500,000 machine price plus €30,000 installation plus €20,000 working capital investment. The €40,000 feasibility study was already paid and is a sunk cost, so it is excluded from the incremental cash flows.
- A€520,000
- B€550,000Correct
- C€590,000
Explanation
The feasibility study is a sunk cost and is ignored. Initial outlay = 500,000 + 30,000 + 20,000 = 550,000. The 590,000 option wrongly adds the sunk study cost; 520,000 omits installation costs.
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