Chapter 9

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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


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