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