Chapter 10

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 US tax law allowing for the accelerated write-off of property under various classifications

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 firms existing projects

incremental cash flows

the difference between a firms 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

depreciation tax shield

the tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate

pro forma financial statements

financial statements projecting future years' operations