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