Final (Ch. 9) Flashcards
1
Q
Incremental Cash Flows
A
- The difference between a firm’s future cash flows with a project and those without the project
2
Q
Stand Alone Principal
A
- The assumption that evaluation of a project may be based on the project’s incremental cash flows
3
Q
Sunk Cost
A
- A cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision
4
Q
Opportunity Cost
A
- The most valuable alternative that is given up if a particular investment is undertaken
5
Q
Erosion
A
- The cash flows of a new project that come at the expense of a firm’s existing projects
6
Q
Pro Forma Financial Statements
A
- Financial statements projecting future years’ operations
7
Q
Depreciation Tax Shield
A
- The tax that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate
8
Q
Accelerated Cost Recovery System (ACRS)
A
- Depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
9
Q
Forecasting Risk
A
- The possibility that errors in projected cash flows will lead to incorrect decisions. Also estimation risk
10
Q
Scenario Analysis
A
- The determination of what happens to net present value estimates when we ask what-if questions
11
Q
Sensitivity Analysis
A
- Investigation of what happens to net present value when only one variable is changed
12
Q
Managerial Options
A
- Option to Expand
- Option to Abandon
- Option to Wait
13
Q
Capital Rationing
A
- The situation that exists if a firm has a positive net present value projects but cannot obtain the necessary financing
14
Q
Soft Rationing
A
- The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting
15
Q
Hard Rationing
A
- The situation that occurs when a business cannot raise financing for a project under any circumstances.
