Canning-Fall 2025 Incremental Free Cash Flows

These flashcards cover key concepts related to incremental free cash flows and capital budgeting as outlined in the lecture notes.

Free Cash Flow (FCF)

The incremental effect of a project on a firm’s available cash.

Incremental Free Cash Flows

Additional cash flows a firm expects to generate from undertaking a project, compared to not undertaking it.

Depreciation Tax Shield

Tax savings resulting from deducting depreciation from taxable income.

Opportunity Costs

Benefits of cash flows forgone by choosing one investment over another alternative.

Externalities

Indirect effects of a project that may increase or decrease profits of other activities.

Sunk Costs

Unrecoverable costs a firm is liable for, which should not influence ongoing project decisions.

Modified Accelerated Cost Recovery System (MACRS)

U.S. tax method for accelerated depreciation that allows for higher deductions in early years.

Liquidation Value

The final asset value that considers cash inflows from sale or outflows from disposal costs.

Break-Even Point

The value of a parameter where NPV equals zero.

Sensitivity Analysis

A tool used to see how NPV changes when one key assumption is varied.

Real Options

The right (but not obligation) to take a business action within a project.

Capital Budgeting

The process of planning and managing a firm's long-term investments.