CFA 35: Capital Budgeting

Question 1

sunk cost

Answer 1

A cost that has already been incurred. You cannot change a sunck cost, and today’s decisions should not be based off of it.

Question 2

opportunity cost

Answer 2

What a resource is worth in its next-best use.

Question 3

incremental cash flow

Answer 3

Cash flow realized because of a decision: the cash flow with a decision minus the cash flow without that decision.

Question 4

externality

Answer 4

The effect of an investment on other things besides the investment itself.

Question 5

cannibalization

Answer 5

An externality where an investment takes customers and sales away from another part of the company

Question 6

conventional cash flows

Answer 6

A cash flow pattern with one INITIAL outflow followed by a series of inflows; cash flow signs change once

Question 7

nonconventional cash flows

Answer 7

A cash flow pattern where the initial outflow is not followed by inflows only, but the cash flows can flip from positive to negative again

Question 8

independent projects

Answer 8

Projects whose cashflows are independent of each other.

Question 9

mutually exclusive projects

Answer 9

Projects that compete directly with each other. You can choose project A or B, but not both.

Question 10

project sequencing

Answer 10

Many projects are sequened through time, so that investing in a project creates the option to invest in future projects. . If the financial results, or new economic conditions, are favorable, you invest in another project, if not, you do not invest in the second project.