83 terms

NPV

The difference between an investments market value and its costs is refereed to as ?

Discounted Cash Flow Valuation

The process of valuing an investment by discounting its future cash flows is called ?

Accepted , Rejected

An investment should be _________ if the NPV is positive, and _________ if the NPV is negative.

Payback

Based on the _________ rule, an investment is acceptable if its calculated payback period is less than some pre-specified number of years.

Discounted Payback

The _______ _________ period is the length of time until the sum of the discounted cash flows is equal to the initial investment.

Discounted Payback

Based on the _________ __________ rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.

Average Accounting Return (AAR)

An investment's average net income divided by its average book value is referred to as the ?

Acceptable

Based on the Average Accounting Return rule, a project is ________ if its average accounting return exceeds a target average accounting return.

Internal rate of return (IRR)

The most important alternative to NPV is the ?

IRR

The discount rate that makes the NPV of an investment zero is the ?

acceptable

Based on the IRR rule, an investment is __________ if the IRR exceeds the required return.

rejected

An investment should be _________ if the IRR does does not exceed the required return.

Multiple rates of return

The possibility that more than one discount rate will make the NPV of an investment zero is referred to as ?

Mutually Exclusive investment decisions

A situation in which taking one investment prevents the taking of another is called?

Profitability Index

The present value of an investment's future cash flows divided by its initial costs is referred to as the ?

Profitability Index

The benefit-cost ratio is also referred to as the ?

not required

Modifying the cash flows is ________ _________ to compute an internal rate of return when a project's cash flows are conventional.

greater , less

When evaluating a project using the profitability index, a number ______ than one indicates a positive NPV, and a number ________ than one indicates a negative NPV.

Incremental cash flows

The difference between a firm's future cash flows with a project and those without the project are referred to as ?

Incremental cash flows

The _______ _______ _______ for project evaluation consist of any and all changes in the firm's future cash flows that are a direct consequence of taking the project.

Stand-alone

Once we identify the effect of undertaking the proposed project on the firm's cash flows, we need focus only on the project's resulting incremental cash flows. This is called the ______-________ principle.

Stand-alone principle

This is the assumption that evaluation of a project may be based on the project's incremental cash flows.

not relevant

Any cash flow that exists regardless of whether or not a project is undertaken is ______ _______.

sunk cost

A _____ _______ is a cost that has already been incurred and cannont be removed and therefore should not be considered in an investment decesion.

Opportunity Cost

An ______ _______ is the most valuable alternative that is given up if a particular investment is undertaken.

erosion

The cash flows of a new project that come at the expense of a firm's existing projects is referred to as _________.

erosion

_______ is relevant only when the sales would not otherwise be lost.

aftertax

Whenever we write incremental cash flows, we mean ______ incremental cash flows.

Pro-forma , projected

The first thing you need to begin evaluating a proposed investment is a set of _________, or ________ financial statements.

Project Operating Cash Flow -

Project Change in NWC -

Project Capital Spending

Project Change in NWC -

Project Capital Spending

Project Cash Flow = ______ - ______ - _______

OCF

EBIT + Depreciation - Taxes = _____

1. EBIT + Dep - Taxes

2. Top-Down approach

3. Tax shield approach

4. Bottom-up approach

2. Top-Down approach

3. Tax shield approach

4. Bottom-up approach

What are the 4 different ways to calculate OCF?

Top Down approach

Which OCF approach is this?

OCF = Revenue - Total Costs - Taxes

OCF = Revenue - Total Costs - Taxes

Bottom up approach

Which OCF approach is this?

OCF = Net Income + Dep + Interest

OCF = Net Income + Dep + Interest

Tax shield approach

Which OCF approach is favored in Microeconomics?

Tax Shield approach

Which OCF approach is this?

OCF = (revenue - total costs)(1-t) + t(depreciation)

OCF = (revenue - total costs)(1-t) + t(depreciation)

Assets

OCF represents the profits generated by ________.

outflow

An increase in NWC is a cash ________.

Sensitivity of NPV to a variable (elasticity)

What is the formula below?

% change in NPV / % change in variable

% change in NPV / % change in variable

Forecasting Risk

The possibility that we will make a bad decision because of errors in the projected cash flows is called?

Scenario analysis

The basic form of what-if analysis is called _____ _______.

Scenario analysis

______ _______ is the determination of what happens to NPV estimates when we ask what-if questions.

Sensitivity analysis

_______ ________ is a variation on scenario analysis that is useful in pinpointing the areas where forecasting risk is especially severe.

Simulation analysis

_____ ______ is a combination of scenario and sensitivity analysis.

Break-even

______ ______ analysis is a popular and commonly used tool for analyzing the relationship between sales volume and profitability.

Variable

_______ costs are costs that change when the quantity of output changes.

Fixed

_______ costs are costs that do not change when the quantity of output changes during a particular time period.

Marginal or Incremental

_______ or ________ cost is the change in cost that occurs when there is a small change in output.

Marginal or Incremental

_______ or _______ revenue is the change in revenue that occurs when there is a small change in output.

Accounting

The most widely used measure of break-even analysis is the _________ method.

accounting

The _______ break-even point is simply the sales level that results in a zero project net income.

Cash

______ break-even is the sales level that results in a zero OCF.

Financial

________ break-even is the sales level that results in a zero NPV.

Operating leverage

______ _______ is the degree to which a project of firm is committed to fixed production costs.

Capital intensive

Projects with a relatively heavy investment in plant and equipment will have a relatively high degree of operating leverage. Such projects are said to be _____ _______.

Degree of Operating Leverage (DOL)

The percentage change in operating cash flow relative to the percentage change in quantity sold is referred to as ?

Capital rationing

______ ______ is the situation that exists if a firm has a positive NPV projects but cannot find the necessary financing.

Soft rationing

______ _______ is the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.

Hard rationing

______ _______ is the situation that occurs when a business cannot raise financing for a project under any circumstances.

Net Income

In accounting break-even, _____ _____ equals zero.

OCF

In cash break-even, _______ equals zero.

NPV

In financial break-even, ______ equals zero.

Equivalent annual cost

The annual annuity stream of payments that has the same precent value as a project's costs is referred to as ?

Equivalent annuan cost

______ ______ ______ is the present value of a project's costs calculated on an annual basis.

depreciated

Land cannot be _______.

zero

The NPVis equal to ______ if a project is operating at its financial break even point.

capital intensive

A _____ ______ is one that has a relatively high degree of operating leverage.

sensitivity

________ analysis is an investigation of what happens to NPV when only one variable is changed.

Net Income

_____ ______ must equal zero at the accounting break-even point.

OCF

______ must equal zero at the cash break even point.

NPV

______ must equal zero at the financial break even point.

low

A firm with low operating leverage will have ____ fixed costs compared to a firm with high operating leverage.

Stand alone principle

The analysis of a project based on the project's relevant cash flows is referred to as the ?

A zero NPV for the project

A bid price of a project is based on what?

A rate equal to the required return

What rate of return will a firm earn if it accepts a project with a sales price per unit set equal to the bid price?

be replaced when they wear out

The EAC of two machines assumes the machines will?

discounted payback period

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the?

IRR

The discount rate which causes the NPV of a project to equal zero is the ?

depreciation tax shield

The amount of tax that is saved because of the depreciation expense is referred to as the ?

sensitivity

An analysis of the change in a project's NPV when a single variable is changed is called _______ analysis.

Interest

The operating cash flow for a project should exclude ?

I, III, and IV only

Which of the following statements are identified with financial break-even point?

I. The present value of the cash inflows exactly offsets the initial cash outflow.

II. The payback period is equal to the life of the project.

III. The NPV is zero.

IV. The discounted payback period equals the life of the project.

I. The present value of the cash inflows exactly offsets the initial cash outflow.

II. The payback period is equal to the life of the project.

III. The NPV is zero.

IV. The discounted payback period equals the life of the project.

$5

Jill's Jello produces 30,000 units and sells those units for $10 each. The company spends $60,000 on rent and machinery, and $5 per unit in materials and labor. The marginal profit for the firm is: