Saturday, February 03, 2007

Managerial finance -- Chapter 10

risk and refinements in capital budgeting
terms

Risk (in capital budgeting) -- the chance that a project will prove unacceptable or, more formally, the degree of variability of Cash flows
breakeven cash inflow -- the minimum level of cash inflow necessary for a project to be acceptable, that is, in any NPV >$0
scenario analysis -- a behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of variables
simulation -- a statistics based behavioral approach that applies predetermined probability distributions and random numbers to estimate risky outcomes
exchange rate risk -- the danger that an unexpected change in the exchange rate between the dollar in the currency in which the project's cash flows are denominated will reduce the market value of that project cash flow
transfer prices -- prices that subsidiary's charge each other for the goods and services traded between them
risk adjusted discount rate (RADR) -- the rate of return that must be earned on a given project to compensate the firm's owners adequately -- that is, to maintain or improve the firm's share price
annualized net present value (ANPV) approach -- and approach to evaluating unequal-lived projects that converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount (in NPV terms)
real options -- opportunities that are embedded in capital projects that enable managers to alter their cash flows and risk in a way that affects project acceptability (NPV), also called strategic options
internal rate of return approach -- an approach to capital rationing that involves graphing Project IRRs in descending order against the total dollar investment to determine the group of acceptable projects
investment opportunities schedule (IOS) -- the graph that plots project IRRs and ascending order against the total dollar investment
net present value approach -- an approach to capital rationing that is based on the use of present values to determine the group of projects that will maximize owners wealth