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Finance_10

Capital Budgeting Cash Flows

QuestionAnswer
The funds that the firm receives and is able to reinvest,as opposed to accounting profits which are shown when they are earned rather than when the money is actually in hand. Incremental Cash Flow
Working Capital
Sunk Costs
The immediate cash outflow necessary to purchase the asset and put it in operating order. Initial Outlay
The change in operating cash flow less any change in net working capital and less any change in capital spending. Annual Cash Flow
Terminal Cash Flow
A project's risk ignoring the fact that much of the risk will be diversified away as the project is combined with the firm's other projects and assets. Project Standing Alone Risk
The amount of risk that the project contributes to the firm as a whole; This measure considers the fact that some of the project's risk will be diversified away as the project is combined with the firm's other projects and assets. Contribution to Firm Risk
Some of a project's risk will be diversified away as the project is combined with the firm's other projects and in addition, some of the remaining risk will be diversified away by shareholders as the combine this stock with other stocks in their portfolio Systematic Risk
A method of risk adjustment when the risk associated with the investment is greater than the risk involved in a typical endeavor. Using this method, the discount rate is adjusted upward to compensate for this added risk. Risk-Adjusted Discount Rate
A method for estimating a project's or division's beta that attempts to identify publicly traded firms engaged solely in the same business as the project or division. Pure Play Method
A method for dealing with risk where the performance of the project under evaluation is estimated by randomly selecting observations from each of the distributions that affect the outcome of the project and continuing with until probable outcome. Simulation
A simulation approach for gauging a project's risk under the worst, best and most likely outcomes. The firm's management examines the distribution of the outcomes to determine the project's level of risk and then makes the appropriate adjustment. Scenario Analysis
Change in the distribution of possible NPV or internal rates of return for a particular proj resulting from a change in one particular input variable is calculated. Sensitivity Analysis
Created by: Wilkins188