Finance Test #3

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Author:
only1ssbrown
ID:
118137
Filename:
Finance Test #3
Updated:
2011-11-20 16:25:12
Tags:
finance
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Description:
Finance Test #3
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  1. INCREMENTAL CASH FLOWS
    the difference between a firm's cash flows with a project and those without the project; any and all changes in the firm's future cash flows that are a direct consequence of taking the project; should be included in the capital budgeting analysis because they are relevant
  2. STAND ALONE PRINCIPLE
    the assumption that evaluation of a project may be based on the project's incremental cash flows; allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows
  3. SUNK COST
    a cost that has already been paid or incurred and can't be removed; has to be paid no matter what; SHOULD NOT be considered in an investment decision
  4. OPPORTUNITY COST
    the most valuable alternative that is given up if a particular investment is undertaken; what are we going to give up by accepting the project; costs of lost options; SHOULD be considered in an investment decision
  5. EROSION
    the cash flows of a new project that come at the expense of a firm's existing projects; negative side effect; negative impact on the cash flows of an existing product from the introduction of a new product = lost profits; SHOULD be considered in an investment decision
  6. OCF (Operating Cash Flows)
    (R - C) (1 -T) + Dt
  7. EQUIVALENT ANNUAL COST
    the present vale of a project's costs calculated on an annual basis

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