Term
| First step in evaluating a proposed investment |
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Definition
| deciding which cash flows are relevant and which are not |
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Term
Incremental cash flows
(relevant cash flows) |
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Definition
| the difference between a firm's future cash flows with a project and those without the project |
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Term
Stand-alone Principle
(minifirm) |
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Definition
the assumption that evaluation of a project may be based on the project's incremental cash flows
(comparing cash flows to cost of acquisition) |
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Term
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Definition
| cost already paid or incurred the liability to pay |
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Term
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Definition
| positive cash flow if investment is undertaken |
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Term
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Definition
| the cash flows of a new project that come at the expense of a firm's existing projects |
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Term
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Definition
| when the sales would not otherwise be lost |
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Term
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Definition
| a component of cash flow to creditors not from assets |
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Term
| Pro forma financial statements |
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Definition
| Financial statements projecting future years operations |
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Term
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Definition
| the tax savings resulting from dep deduction, calculated as dep mult by corporate tax rate |
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Term
Accelerated Cost Recovery System
(ACRS) |
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Definition
| dep method under US tax law allows for accelerated write-off of property under various classifications |
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Term
| inventory costs are overstated when |
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Definition
| inventories fall and are not replaced |
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Term
| payables are understated when |
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Definition
| payables fall and you pay suppliers more than you collected |
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Term
forecasting risk
(estimation risk) |
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Definition
| the possibility that errors in projected cash flows will lead to incorrect decisions |
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Term
1st step to investigating a new project
(base case) |
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Definition
| estimate NPV based on projected cash flow |
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Term
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Definition
| the determination of what happens to net present value estimates when we ask what-if questions |
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Term
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Definition
| freeze all other variables except one and then see how sensitive estimate of NPV is to changes in that one variable |
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Term
managerial options
(real options) |
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Definition
| opportunities that managers can exploit if certain things happen in the future |
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Term
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Definition
| taking into account the managerial options implicit in a project |
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Term
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Definition
| options for future, related business products or strategies |
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Term
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Definition
| exists when you have profitable NPV investments available but cant get the needed funds to undertake them |
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Term
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Definition
| the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting |
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Term
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Definition
| when a business cannot raise financing fro a project under any circumstances |
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Term
| investment in net working capital arises when: |
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Definition
- inventory is purchased
- cash is kept for unexpected expenditures
- credit sales are made |
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Term
| interest expenses incurred on debt financing are: |
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Definition
| ignored when computing cash flows from a project |
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Term
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Definition
| most difficult and important value to establish |
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Term
NPV is superior capital budgeting technique
#1 |
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Definition
| it considers the riskiness of the project |
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Term
NPV is superior capital budgeting technique
#2 |
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Definition
| it considers all the cash flows |
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Term
NPV is superior capital budgeting technique
#3 |
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Definition
| is properly chooses among mutually exclusive projects |
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Term
NPV is superior capital budgeting technique
#4 |
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Definition
| it considers time value of money |
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Term
| as depreciation expense increases |
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Definition
| net income and taxes will decrease, while investment cash flows will increase |
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