CH11 Flashcards
What is Capital Expenditure (CapEx)?
Spending on assets that bring benefits for more than one year.
What is Capital Budgeting?
The process of deciding which projects a company should invest in.
Formula: After-Tax Operating Cash Flow
CF = (Revenues – Costs) × (1 – T)
Formula: Depreciation Tax Shield
Tax Shield = CCA × T
Formula: Net Cash Flow (each year)
NCF = CFBT × (1 – T) + CCA × T
CCA Definition
Capital Cost Allowance – Canada’s version of tax depreciation.
UCC Definition
Undepreciated Capital Cost – remaining balance in the depreciation class.
Half-Year Rule
In year of purchase, only 50% of CCA is claimable.
Formula: PV of CCA Tax Shield (when UCC > SV)
PV = T × d × (UCC – SV) / (k + d)
Salvage Value
Expected resale value of an asset at end of its useful life.
What is Net Working Capital (NWC)?
Current assets – current liabilities, often tied up in operations.
What’s included in Initial Investment (CF₀)?
Capital cost + shipping + installation + ΔNWC + opportunity costs
What is a Sunk Cost?
A cost already incurred and not recoverable → excluded.
What is an Opportunity Cost?
The value of the next best alternative use of a resource → included.
What is an Externality?
Indirect effect of a project (positive or negative) on other cash flows.
Beaver Brewing CF₀ total
$102,000 = $90K + $10K + $2K NWC
Beaver Brewing SV and Tax Shield
SV = $10,000, PV of Tax Shield ≈ $10,880
XYZ NWC adjustment
+$2,000 upfront
CCA Classes
Class 8 = 20% (Furniture), Class 10 = 30% (Vehicles), etc.
