Finance 3000 Exam 4

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

incremental cash flows

cash flows directly attributable to the adoption of a new project

opportunity cost

the dollar cost or forgone opportunity of using an asset already owned by the firm, or a person already employed by the firm, in a new project

sunk cost

a cost that has already been incurred and cannot be recovered

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

financing costs

interest paid to debt holders or dividends paid to stockholders

depreciable basis

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

section 179 deduction

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

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

normal cash flows

a set of cash flows with all outflows occurring at the beginning of the set

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

net present value (NPV)

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

internal rate of return (IRR)

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

NPV profile

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

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

mutually exclusive projects

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

interest-rate cognizant

a decision making process that includes the cost of capital calculation

profitability index (PI)

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