Flashcards in BEC 3 Financial modeling Deck (12):

1

## 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

2

## After tax cash flow

### (1- tax rate) x Pretax cash flows

3

## A depreciation tax shield

### Tax rate x depreciation deduction

4

## 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

5

## 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

6

## Net present value NPV

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

7

## 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.

8

## 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.

9

## Investment decisions made using IRR

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

10

## Payback method

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

11

## Operating leverage

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

12