unit 8: advanced CFs

Flashcards covering key concepts related to Discounted Cash Flow Analysis and Advanced Project Analysis Issues.

MACRS

Modified Accelerated Cost Recovery System, an accelerated depreciation method that reduces net income by recognizing expenses earlier.

Cannibalization

new product will decrease sales of existing products

Incremental Benefits

New product will increase sales of related accessories

Depreciation Tax Shield

The tax reduction benefit received from depreciation, realized earlier due to accelerated methods.

NPV (Net Present Value)

The difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Opportunity Cost of Capital

The return rate that could be earned on an investment if it were put into the next best alternative.

Inflation

The rate at which the general level of prices for goods and services is rising.

Capital Rationing

A process where a firm sets a limited amount of capital available for investment despite having positive NPV projects.

Sensitivity Analysis

A technique to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions.

Scenario Analysis

A process of analyzing possible future events by considering alternative possible outcomes.

Break-Even Analysis

The analysis of the level of sales at which a company's total revenues equal its total expenses.

Real Options

Choices that become available to managers as a project progresses and market conditions change.

Decision Trees

A diagram that shows the sequential decisions and possible outcomes of a project.

Abandonment Option

The option to walk away from an investment if it turns out to be unsuccessful.

Option to Expand

The option to start with limited production and expand based on the product's success.