Term
| If a project has normal cash flows and its IRR exceeds its WACC |
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Definition
| then the project's NPV must be positive. |
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Term
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Definition
| may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendation regarding the acceptability of a normal, independent project. |
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Term
| Projects with normal cash flows |
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Definition
| can have only one real IRR. |
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Term
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Definition
| if the cash flows of one are unaffected by the acceptance of the other |
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Term
| mutually exclusive projects |
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Definition
| if the cash flows of one, can be adversely impacted by the acceptance of the other |
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Term
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Definition
| = # of years prior to full recovery+ (unrecovered cost at start of year/cash flow during full recovery year) |
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Term
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Definition
-if projects are independent, accept if project NPV>0
-if projects are mutually exclusive, accept projects with highest positive NPV |
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Term
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Definition
-if IRR >WACC projects return exceeds its cost anfd there is some return left over to boost stockholders return= ACCEPT
-if IRR
you always want the highest IRR |
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Term
| three cost of equity methods |
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Definition
| CAPM, Bond yield + risk premium, discounting cash flows |
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Term
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Definition
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Term
| Bond yield + risk premium |
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Definition
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Term
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Definition
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Term
| WACC (weighted average cost of capital) |
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Definition
wDrD(1-T)+wPrP+wCrC
(D=debt, P=Preferred, C=common)(w=weight and r=rate or cost) |
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Term
| why is this true: The proposed new project would have more stand-alone risk than the firm's typical project. |
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Definition
| because the project has a relatively high standard deviation and thus more stand-alone risk than average. The project would be counter-cyclical to the rest of the firm and to other firms, hence its within firm and market risks would be relatively low. |
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Term
| cash flows that should be included in the analysis of a project? |
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Definition
a. Changes in net operating working capital.
b. Shipping and installation costs.
c. Cannibalization effects.
d. Opportunity costs. |
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Term
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Definition
| firms can write off assets faster than they could under straight line depreciation, and as a result projects' forecasted NPVs are normally higher than they would be if straight line depreciation had to be used for tax purposes. |
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Term
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Definition
| is a type of externality that is not against the law because any harm it causes is done to the firm itself. |
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Term
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Definition
| Is measured by the correlation of project cash flows with other company cash flows |
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Term
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Definition
| is measured by standard deviation |
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Term
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Definition
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Term
| If the expected rate of return is higher > WACC |
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Definition
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