Corporate Finance Ch.9,10,11
Payback period
the amount of time required for an investment to generate cash flows sufficient to recover its initial cost
Stand-alone principle
the assumption that evaluation of a project may be based on the projects incremental cash flows
Erosion
the cash flows of a new project that come at the expense of a firm's existing projects
Marginal, or incremental, cost
the change in costs that occurs when there is a small change in output
Marginal, or incremental, revenue
the change in revenue that occurs when there is a small change in output
Operating leverage
the degree to which a firm or project relies on fixed costs
Scenario analysis
the determination of what happens to NPV estimates when we ask what-if questions
Incremental cash flows
the difference between a firm's future cash flows with a project and those without the project
Net Present Value (NPV)
the difference between an investment's market value and its costs
Internal rate of return (IRR)
the discounted rate that makes the NPV of an investment zero
Discounted payback period
the length of time required for an investment's discounted cash flows to equal its initial cost
Opportunity cost
the most valuable alternative that is given up if a particular investment is undertaken
Degree of operating leverage (DOL)
the percentage change in operating cash flow relative to the percentage change in quantity sold
Pro forma financial statements
financial statements projecting future years' operations
Simulation analysis
a combination of scenario and sensitivity analysis
Sunk cost
a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision
Accelerated cost recovery system (ACRS)
a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
Net present value profile
a graphical representation of the relationship between an investment's NPVs and various discount rates
Mutually exclusive investment decisions
a situation in which taking one investment prevents the taking of another
Sensitivity analysis
an investigation of what happens to NPV when only one variable is changed
Average accounting return (ARR)
an investment's average net income divided by its average book value
Variable costs
costs that change when the quantity of output changes
Fixed costs
costs that do not change when the quantity of output changes during a particular time period
Forecasting risk
the possibility that errors in projected cash flows will lead to incorrect decisions. also known as estimation risk
Multiple rates of return
the possibility that more than one discount rate will make the NPV of an investment zero
Equivalent annual cost (EAC)
the present value of a project's cost calculated on an annual basis
Profitability index (PI)
the present value of an investment's future cash flows divided by its initial cost. also called the benefit-cost ratio
Discounted cash flow (DCF) valuation
the process of valuing an investment by discounting its future cash flows
Financial break-even
the sales level that results in a zero NPV
Cash break-even
the sales level that results in a zero operating cash flow
Accounting break-even
the sales level that results in zero project net income
Capital rationing
the situation that exists if a firm has positive NPV projects but cannot find the necessary financing
Depreciation tax shield
the tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate
