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Flashcards in Chapter 14 definitions Deck (14)
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Marginal or incremental cash flows

the additional cash flows that result from capital budgeting decisions, generated by new projects



the consequences that result from an investment that may benefit or harm unrelated third parties.


initial after tax cash flow

the total cash outlay required to initiate an investment project, including the change in net working capital and associated opportunity costs


Capital cost

all costs incurred to make an investment operational, such as machinery installation expenses, land-clearing costs , and so on; these can be depreciated for tax purposes


expected annual after tax cash flows

the cash flows that are estimated to occur as a result of the investment decision, comprising the associated expected incremental increase in after tax operating income and any incremental tax savings (or additional taxes paid) that result from the initial investment outlay.


ending (or terminal) after tax cash flow (ECF)

the total cash flow that is expected to be generated in the terminal year of a project, aside from that year's expected after-tax cash flow; the estimated salvage value of the asset


Salvage value

the estimated sale price of an asset at the end of its useful life


Sensitivity analysis

an examination of how an investment's NPV changes as the value of different inputs are changed, one input at a time


Scenario Analysis

an examination of how an investment's NPV changes in response to varying scenarios in terms of one or more estimates, such as sales or costs


Real Option valuation (ROV)

an assessment that recognizes that firms respond to different circumstances and change their operating characteristics


decision tree

a schematic way to represent alternative decisions and the possible outcomes


NPV Break-even point

the level of annual operating cash flow required for a project to produce an NPV of zero


Expansion projects

projects tat add something extra to the firm in terms of sales or cost savings; their new cash flows are incremental cash flows


replacement projects

projects that involve the replacement of an existing asset (or assets) with a new one