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Flashcards in BEC 3 Financial modeling Deck (12)
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Sunk costs

Sunk costs are those costs that have already been incurred, are unavoidable in the future, and will not vary with the course of action taken


After tax cash flow

(1- tax rate) x Pretax cash flows


A depreciation tax shield

Tax rate x depreciation deduction


Stages in which capital investment cash flows are categorized

Cash flow at the inception of the project
Operating cash flows
Cash flows from the disposal of the project


Rate of return for a project

- use a weighted average cost of capital (WACC) method
- assign a target rate for new projects
- recommended that the discount rate be related to the risk of the project


Net present value NPV

NPV is the difference between the present value of the cash inflows and outflows from a project


Profitability index

The ratio of the present value of net future cash inflows to the present value of the net initial investment.
The higher the profitability index, the more desirable the project.


Internal rate of return IRR

The IRR is the discount rate at which the present value of the cash inflows equals the present value of the cash outflows form an investment or project.


Investment decisions made using IRR

An investment should be made when the IRR exceeds the hurdle rate


Payback method

Net initial investment / Increase in annual net after tax cash flow


Operating leverage

Operating leverage is defined as the degree to which a firm uses fixed operating costs, as opposed to variable operating costs


Degree of operating leverage formula

% change in Earnings before interest and taxes / % Change in sales