diff --git a/tests/Initialize-PSBuild.tests.ps1 b/tests/Initialize-PSBuild.tests.ps1
new file mode 100644
index 0000000..2217eda
--- /dev/null
+++ b/tests/Initialize-PSBuild.tests.ps1
@@ -0,0 +1,90 @@
+Describe 'Initialize-PSBuild' {
+
+    BeforeAll {
+        $script:moduleRoot = Split-Path -Path $PSScriptRoot -Parent
+        Import-Module -Name ([IO.Path]::Combine($script:moduleRoot, 'Output', 'PowerShellBuild')) -Force
+    }
+
+    BeforeEach {
+        $script:originalProjectPath = $env:BHProjectPath
+        $script:originalProjectName = $env:BHProjectName
+        $env:BHProjectPath = Join-Path -Path $TestDrive -ChildPath 'ExampleProject'
+        $env:BHProjectName = 'ExampleModule'
+
+        $script:buildEnvironment = @{
+            Build   = @{
+                OutDir      = 'Output'
+                ModuleOutDir = $null
+            }
+            General = @{
+                ModuleVersion = '1.2.3'
+            }
+        }
+
+        Mock -CommandName 'Set-BuildEnvironment' -ModuleName 'PowerShellBuild'
+    }
+
+    AfterEach {
+        if ($null -eq $script:originalProjectPath) {
+            Remove-Item -Path 'Env:BHProjectPath' -ErrorAction SilentlyContinue
+        }
+        else {
+            $env:BHProjectPath = $script:originalProjectPath
+        }
+
+        if ($null -eq $script:originalProjectName) {
+            Remove-Item -Path 'Env:BHProjectName' -ErrorAction SilentlyContinue
+        }
+        else {
+            $env:BHProjectName = $script:originalProjectName
+        }
+    }
+
+    It 'resolves a relative output path below the project root' {
+        Initialize-PSBuild -BuildEnvironment $script:buildEnvironment
+
+        $expectedModuleOutputPath = [IO.Path]::Combine(
+            $env:BHProjectPath,
+            'Output',
+            $env:BHProjectName,
+            $script:buildEnvironment.General.ModuleVersion
+        )
+        $script:buildEnvironment.Build.ModuleOutDir | Should -Be $expectedModuleOutputPath
+
+        $shouldInvokeParameters = @{
+            CommandName     = 'Set-BuildEnvironment'
+            ModuleName      = 'PowerShellBuild'
+            Times           = 1
+            Exactly         = $true
+            ParameterFilter = {
+                $BuildOutput -eq $expectedModuleOutputPath -and $Force
+            }
+        }
+        Should -Invoke @shouldInvokeParameters
+    }
+
+    It 'resolves a project-rooted output path at the configured location' {
+        $projectOutputPath = [IO.Path]::Combine($env:BHProjectPath, 'Output')
+        $script:buildEnvironment.Build.OutDir = $projectOutputPath
+
+        Initialize-PSBuild -BuildEnvironment $script:buildEnvironment
+
+        $expectedModuleOutputPath = [IO.Path]::Combine(
+            $projectOutputPath,
+            $env:BHProjectName,
+            $script:buildEnvironment.General.ModuleVersion
+        )
+        $script:buildEnvironment.Build.ModuleOutDir | Should -Be $expectedModuleOutputPath
+
+        $shouldInvokeParameters = @{
+            CommandName     = 'Set-BuildEnvironment'
+            ModuleName      = 'PowerShellBuild'
+            Times           = 1
+            Exactly         = $true
+            ParameterFilter = {
+                $BuildOutput -eq $expectedModuleOutputPath -and $Force
+            }
+        }
+        Should -Invoke @shouldInvokeParameters
+    }
+}