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10 Cards in this Set
- Front
- Back
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Incremental Cash Flows
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Decisions are based on cash flow, not accounting income
The change in cash if the project is undertaken |
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Externalities
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The effects the acceptance of the project may have on other firm cash flow
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Conventional Cash Flow Pattern
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The pattern of cash flow only change once
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Cannibalization
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New project takes sales from an existing project
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Opportunity cost
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Cash flow the firm will lose if the project is undertaken
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Independent projects
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If project A & B are profitable, firm could accept both projects
Accept if NPV is positive |
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Drawbacks of Payback period
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Doesn't take into account cash flows beyond packback period
Do not consider salvage value |
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Profitability Index
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1 + (NPV/Initial Cash outlay)
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IRR (Internal Rate of Return)
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Cost of Capital when NPV = 0
IRR > Cost of capital = accept the project Measures profitability as percentage |
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Crossover rate
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Discount rate that makes NPV of Project A&B Equal
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