Finance Chapter 10
accelerated cost recovery system (ACRS)
a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
winners curse
if you win, you probably underbid. "low bidder is whoever makes the biggest mistake"
pro forma financial statements
financial statements projecting future years' operations
tax shield approach
OCF=(sales-costs)*(1-T)+Depreciation* T
bottom-up approach
OCF=net income+noncash deductions (depreciation)
top-down approach
OCF=sales-costs-taxes
sunk cost
a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision
modified ACRS deprivation (MACRS)
basic idea is that every asset is assigned to a particular class. This class establishes its life for tax purposes. Once the tax life is determined, the depreciation for each year is computed by multiplying the cost of the asset by a fixed percentage.
operating cash flow
earnings before interest and taxes+depreciation-taxes
project cash flow
project operating cash flow-project change in net working capital-project capital spending
stand-alone principle
the assumption that evaluation of a project may be based on the project's incremental cash flows
erosion
the cash flows of a new project that come at the expense of a firm's existing projects
incremental cash flows
the difference between a firm's future cash flows with a project and those without the project
opportunity cost
the most valuable alternative that is given up if a particular investment is undertaken
equivalent annual cost (EAC)
the present value of a project's costs calculated on an annual basis
depreciation tax shield
the tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate