Chapter 9 Flashcards
Relevant Cash Flows
financial managers need to take into account all of a firm’s cash flows where determining whether to take a project or not
Incremental Cash Flows
the difference between the firm’s future cash flows with a project
Stand Alone Principle
the assumption that evaluation of a project may be based on the sum of the relevant cash flows
Types of Incremental Cash Flows- Common Mistakes
Sunk Cost ad Opportunity Cost
Sunk Cost
a cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision
Opportunity Cost
the most valuable alternative that is given up if a particular investment is taken
Side Effects and Erosion
the cash flows form a new project come at the expense of the firm’s existing projects
Pro Forma Financial Statements
these are financial statements which project future year’s operations
Evaluating NPV Estimates
1) determine where the real value in a project is going to come from
2) conducting a “what if” analysis, where future cash flows are determined if these are errors in calculation, or future cash flows to not materialize
Scenario Analysis
analyzed for their potential impact on the project and its cash flows, as well as potential costs for their potential impact on the project and its cash flows, as well as potential costs
Sensitivity Analysis
investigation of what happens to the NPV when only one variable is changed
Managerial Options to Mitigate Risk
opportunities that managers can exploit if certain things happen in the future, AKA real options
Contingency Planning
taking into account the managerial option implicit in a project
Option to expand
this happens with projects with large NPV
option to abandon
this could happen if projects costs get too large and cannot be recouped easily
option to wait
re engage in a project at a later date
