Finance Exam #3

  1. Depreciation has ____ ____ consequence because it influences the tax bill.
    cash flow
  2. When book value = salvage value what do you do?
  3. when book value is < salvage value what do you do?
    report and pay tax becase you made money
  4. when book value > salvage value what do you do?
    it didn't depreciate enough
  5. incremental cash flows
    Different betwen a firm's future cash flows with a project and those without a project
  6. sunk costs
    • -a cost we have already paid or have already incurred the liability to pay
    • -firm has to pay no matter what
    • -not considered in investment decision
  7. opportunity cost
    most valuble alternative that is given up if a particular investment is undertaken
  8. side effects
    spillover effects, both good and bad
  9. erosion
    • -cash flows of a new project that come at the expense of a firm's existing projects
    • -because of other lines in consumer products
    • -any sales lost as a result of our launching a new product might be lost anyway because of future competition
  10. scenario analysis
    • -basic form of what if analysis
    • -what happens to NPV
    • -to get worst cast scenario assign least favorable value to each item (low value for units sold and price per unit and high value for costs)
  11. sensitivity analysis
    freeze all variables except one and see how sensitive our estimate of NPV is to changes in one variable
  12. captial rationing
    exists when a positive NPV is available but we can't get needed funds
  13. pro forma financial statements
    project future years operations
  14. depreciation tax shield
    tax saving that results from the depreciation, deduction, calculated as depreciation multiplied by the corporate tax rate
  15. accelerated cost recovery system (ACRS)
    depreciation method under US tax law allowing for the accelerated write-off of property under various classifications
  16. what should be included in a cash flow at time zero?
    • -Initial inventory increase
    • -initial purchase of fixed assets
Card Set
Finance Exam #3
financial management exam