Chapter 9
the situation that exists if a firm has positive NPV projects but cannot obtain the necessary financing
capital rationing
the difference between a firm's future cash flows with a project and those without the project. looking at each project as an individual firm
incremental cash flows
opportunities that managers can exploit if certain things happen in the future. Also known as "real" options
managerial options
depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
accelerated cost recovery system
T/F sensitivity analysis ignores relationships among variables
T
T/F sensitivity analysis provides some breakeven information
T
net working capital =
CA-CL
T/F one advantage of using sensitivity analysis and scenario analysis is that they both ignore diversification, meaning that they only measure stand-alone risk
F
T/F sensitivity analysis does not identify dangerous variables
F
T/F sensitivity analysis does not provide indication of stand-alone risk
F
T/F subjective adjustments cannot be made when using scenario analysis
F
T/F scenario analysis considers all possible outcomes
F, it only considers a few possible outcomes
T/F sensitivity analysis says nothing about the likelihood of change in a variable
T
T/F sensitivity analysis shows how changes in an input variable affect NPV or IRR
T
T/F scenario analysis assumes perfectly correlated inputs
T
T/F scenario analysis focuses on stand-alone risk only
T
T/F sensitivity analysis answers what if questions
T
taking into account the managerial option implicit in a project
contingency planning
as NPV increases, the rate is going to
decrease
the tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate
depreciation tax shield
cash flows of a new project that come at the expense of a firm's existing projects
erosion
the more sensitive, the greater the _____ ____
forecasting risk
the possibility that errors in projected cash flows will lead to incorrect decisions. Also estimation risk
forecasting risk
the situation that occurs when a business cannot raise financing for a project under any circumstances capital will never be available for this project
hard rationing
which of the following are taken into consideration when suing MACRS depreciation? expected salvage value actual expected economic life
neither
which provides a decision rule? sensitivity analysis or scenario analysis
neither
are financing costs a relevant cash flow?
no
are sunk costs relevant cash flows?
no
does lower=worst?
no
does upper=best?
no
change in net working capital=
nwc-end minus nwc-beginning
the most valuable alternative that is given up if a particular investment is undertaken
opportunity cost
financial statements projecting future years' operation
pro forma financial statements
when is the tax shield approach better to use?
projects that involve cost-cutting
cash flows occurring if and only if the project is accepted
relevant cash flows
cash flows that do not include financing activities yet
relevant cash flows
the determination of what happens to NPV estimates when we ask what-if questions
scenario analysis
investigation of what happens to NPV when only one variable is changed
sensitivity analysis
the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting limited resources are temporary, often self imposed
soft rationing
the assumption that evaluation of a project may be based on the project's incremental cash flows
stand-alone principal
options for future, related business products or strategies
strategic options
a cost that has already been incurred and cannot be recouped and therefore should not be considered in investment decision
sunk cost
whenever the salvage value is different from the book value of an asset there is a ____ effect
tax
are sales recorded when the transaction is made or when cash is received?
when it's made
scenario analysis gives several possible solutions. They are ____ case, ____/____ ____ case, and ____ case
worst; base/most likely; best
are side effects/erosion costs relevant cash flows?
yes
are tax effects relevant cash flows?
yes
is net working capital a relevant cash flow?
yes
is opportunity cost a relevant cash flow?
yes
