ch 9:

though depreciation is a non cash expense, it's important to capital budgeting for these reasons

. it determines the book value of assets which affects net salvage value 2. it determines taxes owed on fixed assets when they are sold 3. it affects a firm's annual tax liability

what is the total number of inputs that change while doing sensitivity analysis

1

once cash flows have been estimated, which of the following investment criteria can be applied to them?

NPV IRR Payback period

correct relationship btwn depr income, taxes, investment from cash flows

ass depreciation expense increases, net income and taxes will decr, while investment cash flows will incr

side effects from investing in a project refer to cash flows from

beneficial spillover effects erosion effects not opp costs

which of the following are considered relevant cash flows

cash flows from beneficial spillover effects cash flows from erosion effects cash flows from external costs

cash flows used in project estimation should always reflect

cash flows when they occur after tax cash flows

what is a scenario analysis

determines the impact on NPV of a set of events relating to a specific scenario

incremental cash flows come about as an __ consequence of taking a project under consideration

direct

the possibility that errors in projected cash flows will lead to incorrect decisions is known as

forecasting risk estimation risk

an incr in depreciation expense will __ cash flows from operations

incr

the stand alone principle assumes that evaluation of a project may be based on the project's __ cash flows

incremental

difference btwn a firm's cash flows w a project vs w/o the proj is called

incremental cash flows

difference btwn firm's cash flows w a project vs w/o the proj is called

incremental cash flows

NPV is considered superior bc

it considers cash flows it properly chooses among mutually exclusive projects it considers time value of money it considers the riskiness of the project

what does sensitivity analysis do

it examines how sensitive a particular NPV calculation is to changes in underlying assumptions

the primary risk in estimation errors is the potential to

make incorrect capital budgeting decisions

an option on a real asset rather than a financial asset is known as

managerial option real option

a positive NPV exists when the market value of a project exceeds its cost. which of these two values is the most difficult to establish

market value

A/R and A/P are included in project cash flow estimation as part of changes in

net working capital

which qualify as managerial options

option to wait, expand, or abandon

One of the most important steps in estimating cash flow is to determine the ____ cash flows

relevant

final step in estimating cash flows is to determine the __ cash flows

relevant

to investigate the impact on NPV of a change in one variable, you would employ

sensitivity analysis

in a competitive market, positive NPV projects are

uncommon