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16 Cards in this Set
- Front
- Back
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Forecasting link
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The possibility that errors in projected cash flows will lead to incorrect decisions. Also, estimation risk.
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Scenario analysis
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The determination of what happens to NPV estimates when we ask what-if questions.
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Sensitivity analysis
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Investigation of what happens to NPV when only one variable is changed.
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Simulation analysis
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A combination of scenario and sensitivity analysis.
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Variable costs
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Costs that change when the quantity of output changes.
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Fixed costs
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Costs taht do not change when the quantity of output changes during a particular time period.
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Marginal, or incremental, cost
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The change in costs that occurs when there is a small change in output.
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Marginal, or incremental, revenue
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The change in revenue that occurs when there is a small change in output.
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Accounting break-even
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The sale level that results in zero project net income.
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Cash break-even
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The sale level that results in a zero operating cash flow.
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Financial break-even
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The sales level that results in a zero NPV.
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Operating leverage
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The degree to which a firm or project relies on fixed costs.
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Degree of operating leverage (DOL)
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The percentage change in operating cash flow relative to the percentage change in quantity sold.
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Capital rationing
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The situation that exists if a firm has positive NPV projects but cannot find the necessary financing.
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Soft rationing
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The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.
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Hard rationing
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The situation that occurs when a business cannot raise financing for a project under any circumstances.
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