Cashflows_and_Advanced_DCF

Net Present Value (NPV)

A financial analysis technique that calculates the present value of expected future cash flows from an investment, subtracted by the initial investment cost.

Capital Budgeting Process

The steps involved in evaluating and selecting long-term investment projects, including estimating cash flows, determining opportunity costs, calculating NPV, and implementing selected alternatives.

Incremental Cash Flow

The additional cash flows generated by a project, calculated as cash flows with the project minus cash flows without the project.

Pro-Forma Financial Statement

A financial report based on hypothetical assumptions used to project future financial performance.

Marginal Tax Rate

The tax rate applied to the next dollar of income earned.

Average Tax Rate

Total taxes paid divided by pretax income.

Break-Even Analysis

An analysis to determine the level of sales at which total revenues equal total costs, resulting in zero profit.

Sensitivity Analysis

A method to assess how the different values of an independent variable affect a particular dependent variable under a given set of assumptions.

Scenario Analysis

A strategic planning method that allows for the analysis of different scenarios, each based on varying assumptions, to assess their impact on a given project.

Simulation Analysis

A quantitative method that models the probabilities of different outcomes in uncertain scenarios, often using statistical tools.

Real Options

The rights, but not the obligations, to buy or sell an asset in the future; incorporates flexibility in investment decisions.

Cannibalization

A situation where new products eat into the sales of existing products.

Investment in Net Working Capital (NWC)

The difference between current assets and current liabilities, which must be considered in total cash flow estimates for a project.

Depreciation Tax Shield

The reduction in taxable income from depreciation, which creates tax savings.

Financing Decisions

Decisions regarding how a company raises or manages its capital for funding its projects.

Opportunity Costs

The potential benefits lost when one alternative is chosen over another, especially when it comes to the use of resources.

Inflation Considerations

Adjustments made to cash flow forecasts to account for rising prices over time that affect expenses and revenues.

Incremental Earnings Formula

(Incremental Revenue - Incremental Cost - Depreciation) x (1 - Tax Rate) = Incremental Earnings.

Abandonment Option

The option to cease a project if it is determined to be unsuccessful, which can add value to an investment.

Timing Option

The ability to delay an investment decision until more information is available to potentially improve project outcomes.

Allocation of Overhead

The distribution of indirect costs among different projects or departments; consideration is needed to determine if overhead is truly incremental.

Decision Trees

Visual representations of sequential decisions and possible outcomes used in the evaluation of investment options.