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.
Based on the _________ rule, an investment is acceptable if its calculated payback period is less than some pre-specified number of years.
The _______ _________ period is the length of time until the sum of the discounted cash flows is equal to the initial investment.
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 ?
Based on the Average Accounting Return rule, a project is ________ if its average accounting return exceeds a target average accounting return.
Based on the IRR rule, an investment is __________ if the IRR exceeds 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?
The present value of an investment's future cash flows divided by its initial costs is referred to as the ?
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.
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.
This is the assumption that evaluation of a project may be based on the project's incremental cash flows.
Any cash flow that exists regardless of whether or not a project is undertaken is ______ _______.
A _____ _______ is a cost that has already been incurred and cannont be removed and therefore should not be considered in an investment decesion.
An ______ _______ is the most valuable alternative that is given up if a particular investment is undertaken.
The cash flows of a new project that come at the expense of a firm's existing projects is referred to as _________.
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 Cash Flow = ______ - ______ - _______
1. EBIT + Dep - Taxes
2. Top-Down approach
3. Tax shield approach
4. Bottom-up approach
What are the 4 different ways to calculate OCF?
Tax Shield approach
Which OCF approach is this?
OCF = (revenue - total costs)(1-t) + t(depreciation)
Sensitivity of NPV to a variable (elasticity)
What is the formula below?
% change in NPV / % change in variable
The possibility that we will make a bad decision because of errors in the projected cash flows is called?
______ _______ is the determination of what happens to NPV estimates when we ask what-if questions.
_______ ________ is a variation on scenario analysis that is useful in pinpointing the areas where forecasting risk is especially severe.
______ ______ analysis is a popular and commonly used tool for analyzing the relationship between sales volume and profitability.
_______ 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.
The _______ break-even point is simply the sales level that results in a zero project net income.
______ _______ is the degree to which a project of firm is committed to fixed production costs.
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 ?
______ ______ is the situation that exists if a firm has a positive NPV projects but cannot find the necessary financing.
______ _______ is the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.
______ _______ is the situation that occurs when a business cannot raise financing for a project under any circumstances.
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.
________ analysis is an investigation of what happens to NPV when only one variable is changed.
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 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?
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?
depreciation tax shield
The amount of tax that is saved because of the depreciation expense is referred to as the ?
An analysis of the change in a project's NPV when a single variable is changed is called _______ analysis.
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.