Finance Exam 4 Ch.11-13

incremental cash flows

Cash flows directly attributable to the adoption of a new project.

discounted payback (DPB)

A capital budgeting method that generates decision rules and associated metrics that choose projects based on how quickly they return their initial investment plus interest.

payback (PB)

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based on how quickly they return their initial investment.

internal rate of return (IRR)

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based on the implicit expected geometric average of a project's rate of return.

profitability index (PI)

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric.

interest-rate cognizant

A decision-making process that includes the cost of capital calculation.

Section 179 deduction

A deduction targeted at small businesses that allows them to immediately expense asset purchases up to a certain limit rather than depreciating them over the assets' useful lives.

NPV profile

A graph of a project's NPV as a function of the cost of capital.

normal cash flows

A set of cash flows with all outflows occurring at the beginning of the set.

net present value (NPV)

A technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows.

mutually exclusive projects

Groups or pairs of projects where you can accept one but not all.

pro forma analysis

Process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements.

modified internal rate of return (MIRR)

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule.

depreciable basis

An asset's cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees.

divisional WACC

An estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division.

substitute and complement

Effects that arise from a new product or service either decreasing or increasing sales, respectively, of the firm's existing products and services.

flotation costs

Fees paid by firms to investment banks for issuing new securities.

financing costs

Interest paid to debt holders or dividends paid to stockholders.

proxy beta

The beta (a measure of the riskiness) of a firm in a similar line of business as a proposed new project.

opportunity cost

The cost or forgone opportunity of using an asset already in use by the firm, or a person already employed by the firm, in a new project.

component costs

The individual costs of each type of capital—bonds, preferred stock, and common stock.

business risk

The risk of a project arising from the line of business it is in; the variability of a firm's or division's cash flows.

financial risk

The risk of a project to equity holders stemming from the use of debt in the financial structure of the firm; refers to the issue of how a firm decides to distribute the business risk between debt and equity holders.

weighted-average cost of capital (WACC)

The weighted-average after-tax cost of the capital used by a firm, with weights set equal to the relative percentage of each type of capital used.

separation principle

Theory maintaining that the sources and uses of capital should be decided upon independently.