Chapter 11 Exam 4 Flashcards
The investment and resulting subsequent inflows associated with a proposal capital expenditure.
Relevant cash flows
Additional cash flows- inflows or outflows- expected to result from a proposed capital expenditure.
Incremental cash flows
Relevant cash outflow for a proposed project at time zero.
Initial investment
Incremental after-tax cash inflows resulting from implementation of a project during its life.
Operating cash inflows.
The after-tax nonoperating cash flow occurring in the final year of a project. It is usually attributable to liquidation of the project.
Terminal cash flow
The new outflow necessary to acquire a new asset.
Cost of new asset
Any added costs that are necessary to place an asset into operation.
Installation costs
Cost of new asset plus it’s installation costs. Equals the assets depreciable value.
Installed cost of new asset
Difference between the old assets sale proceeds and any applicable taxes or tax refunds related to its sale.
After tax proceeds from sale of old asset
Cash inflows, net of any removal or cleanup costs, resulting from the sale of an existing asset.
Proceeds from sale of old asset
Tax that depends on the relationship between the old assets sale price and book value and on existing government tax rules.
Tax on sale of old asset
The strict accounting value of an asset, calculated by subtracting its accumulated depreciation from its installed cost.
Book value
Difference between the firms current assets and its current liabilities.
Net working capital
Difference between a change in current assets and a change in current liabilities.
Change in net working capital.
Rate of return that must be earned on a given project to compensate the firms owners adequately, that is, to maintain or improve the firms share price.
Risk-adjusted discount rate (RADR)
Approach to evaluating unequal-lived projects that converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount
Annualized net present value (ANPV) approach
Approach to capital rationing that involves graphing project IRRS in descending order against the total dollar investment to determine the group of acceptable projects.
IRR approach
Approach to capital rationing that is based on the use of present values to determine the group of projects that will maximize owners wealth.
Net present value approach
A firm can identify the best time to expand by forecasting future firm values assuming expansion occurs in each year and selecting the year
That generates the highest future firm value.
A common use of break even analysis is to determine
How many units of sales are needed to cover all costs.
Simulation analysis is useful because the financial manager can specify a range of values for numerous inputs and then determine
The probability of a positive outcome.
Behavioral approaches for dealing with project risk mag be used to
Get a feel for a level of risk
Firms considering expansion into countries with high levels of political risk can adjust for this risk by
Using risk adjusted discount rates for the project evaluation.
A financial manager that creates an investment opportunities Schedule an then imposed a budget constraint to determine which capital budgeting projects to accept is using the
IRR approach
An increase in the RADR will result in
A decrease in NPV
Incremental earnings are the
Additional sales and costs associated with the project.
A common use of break even analysis is to determine
How many units of sales are needed to cover all costs.
Examples of current account or assets include:
Cash, accounts receivable and inventories.
Examples of current liabilities include:
Accounts payable, notes payable, accruals
