Chapter 14 definitions

Question 1

Marginal or incremental cash flows

Answer 1

the additional cash flows that result from capital budgeting decisions, generated by new projects

Question 2

Externalities

Answer 2

the consequences that result from an investment that may benefit or harm unrelated third parties.

Question 3

initial after tax cash flow

Answer 3

the total cash outlay required to initiate an investment project, including the change in net working capital and associated opportunity costs

Question 4

Capital cost

Answer 4

all costs incurred to make an investment operational, such as machinery installation expenses, land-clearing costs , and so on; these can be depreciated for tax purposes

Question 5

expected annual after tax cash flows

Answer 5

the cash flows that are estimated to occur as a result of the investment decision, comprising the associated expected incremental increase in after tax operating income and any incremental tax savings (or additional taxes paid) that result from the initial investment outlay.

Question 6

ending (or terminal) after tax cash flow (ECF)

Answer 6

the total cash flow that is expected to be generated in the terminal year of a project, aside from that year’s expected after-tax cash flow; the estimated salvage value of the asset

Question 7

Salvage value

Answer 7

the estimated sale price of an asset at the end of its useful life

Question 8

Sensitivity analysis

Answer 8

an examination of how an investment’s NPV changes as the value of different inputs are changed, one input at a time

Question 9

Scenario Analysis

Answer 9

an examination of how an investment’s NPV changes in response to varying scenarios in terms of one or more estimates, such as sales or costs

Question 10

Real Option valuation (ROV)

Answer 10

an assessment that recognizes that firms respond to different circumstances and change their operating characteristics

Question 11

decision tree

Answer 11

a schematic way to represent alternative decisions and the possible outcomes

Question 12

NPV Break-even point

Answer 12

the level of annual operating cash flow required for a project to produce an NPV of zero

Question 13

Expansion projects

Answer 13

projects tat add something extra to the firm in terms of sales or cost savings; their new cash flows are incremental cash flows

Question 14

replacement projects

Answer 14

projects that involve the replacement of an existing asset (or assets) with a new one