Exam 11: Cash Flow Estimation and Risk Analysis

Your company, Omega Corporation, is considering a new project that you must analyze. Based on the following data, what is the project's Year 1 operating cash flow? Sales revenues$25,000 Capital cost allowance$8,000 Cash operating costs$12,000 Tax rate35.0%

Estimating project cash flows is generally the most important but also the most difficult step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than estimating projects' cash flows.

Which of the following statements best describes externalities?

Which of the following statements best describes CCA?

Easy Payment Loan Company is thinking of opening a new office, and the key data are shown below. Easy Payment owns the building, free and clear, and it would sell it for $100,000 after taxes if the company decides not to open the new office. The equipment that would be used would be depreciated by the straight-line method over the project's 3-year life, and would have a zero salvage value. An extra $5,000 of new working capital would be required to get this project running. Revenues and cash operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3 and the increased working capital will be recovered when this project ends. A simplified CCA is for mathematical convenience.) WACC10.0% Net equipment capital cost$65,000 Annual CCA deduction for equipment$21,665 Sales revenues, each year$150,000 Cash operating costs, each year$25,000 Tax rate35.0%

What is the correct rule for capital budgeting analysis?

Which of the following is NOT a cash flow and thus should not be reflected in the analysis of a capital budgeting project?

The undepreciated capital cost (UCC) is defined as the total cost of all assets in a class less the accumulated CCA for that class.