What is Initial Cash Flow
Initial cash flow is the amount of money paid out or received at the start of a project or investment. This is generally a negative amount because projects often require a large initial capital investment by a company at the outset of a project that will generate positive cash flow over time. This initial cash flow is factored into the profitability of a project during the discounted cash flow analysis that is used to evaluate whether or not undertaking the project is profitable. Initial cash flow can also be called initial investment outlay.
BREAKING DOWN Initial Cash Flow
During the capital budgeting process, the attractiveness of a project is evaluated based on the cash flows generated by the project over its life. Using discounted cash flow analysis, the project's future value of the cash flows over its life are brought back to the present value to determine whether it is worthwhile for the company to pursue the project. Because the initial outlay is made at the start of the project (time zero), it isn't discounted. It is very important to use experts who are skilled at estimating a project's expected cash flows, as errors in cash flow or discount rate estimation can result in a company undertaking an unprofitable project.
Example of Initial Cash Flow
For example, an oil company evaluating the attractiveness of a new refinery may budget for an initial outlay of $100 million to get the project started. This is then evaluated along with the future cash flows the project will generate over its life.