Making Capital Investments

Question 1

The difference between a firm’s future cash flows with a project and those without the project.

Answer 1

incremental cash flows

Question 2

The assumption that evaluation of a project may be based on the project’s incremental cash flows.

Answer 2

stand-alone principle

Question 3

A cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision.

Answer 3

sunk cost

Question 4

The most valuable alternative that is given up if a particular investment is undertaken.

Answer 4

opportunity cost

Question 5

The cash flows of a new project that come at the expense of a firm’s existing projects.

Answer 5

erosion

Question 6

Financial statements projecting future years’ operations.

Answer 6

pro forma financial statements

Question 7

depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.

Answer 7

accelerated cost recovery system (ACRS)

Question 8

The tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate

Answer 8

depreciation tax shield

Question 9

The present value of a project’s costs calculated on an annual basis.

Answer 9

equivalent annual cost