Estimating a project relevant cash flows


Problem 1) Define the following terms:

a) Sunk Cost
b) Opportunity cost
c) Allocated cost

Problem 2) Is the following statement true or false. If the statement is true, where or how are these costs reflected?

"Financing costs should be ignored when estimating a project's relevant cash flows."

Problem 3) List and discuss items included in a project's initial cash outflow.

Problem 4) List and discuss items included in a project's terminal cash flow.

Problem 5) Williams Company is evaluating a project requiring a capital expenditure of $400,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows:

Year Net Income Net Cash Flow
1 $ 90,000 $ 250,000
2 80,000 200,000
3 40,000 100,000
4 30,000 100,000
$240,000 $650,000

The company's minimum desired rate of return for net present value analysis is 10%.

Calculate the Net Present Value of the project. Should the company go forward?

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Finance Basics: Estimating a project relevant cash flows
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