Percentage change in NPV resulting from a given percentage change in an input variable, other things held constant.
What is sensitivity analysis?
100
The right but not the obligation to take some future action.
What is a real option?
100
The annual investment in long-term assets that maximizes the firm's value.
What is the optimal capital budget?
200
The best return that could be earned on assets the firm already owns if those assets are not used for the new project.
What is an opportunity cost?
200
The risk an asset would have if it were a firm's only asset and if investors owned only one stock. It is measured by the variability of the asset's expected returns.
What is stand-alone risk?
200
The NPV when sales and other input variables are set equal to their most likely values.
What is the base-case NPV?
200
The option to shut down a project if operating cash flows turn out to be lower than expected.
What is the abandonment option?
200
The situation in which a firm can raise only a specified, limited amount of capital regardless of how many good projects it has.
What is capital rationing?
300
An effect on the firm or the environment that is not reflected in the project's cash flows.
What is an externality?
300
Risk considering the firm's diversification but not stockholder diversification. It is measured by a project's effect on uncertainty about the firm's expected future returns.
What is corporate (within-firm) risk?
300
A risk analysis technique in which "bad" and "good" sets of financial circumstances are compared with a most likely, or base case, situation.
What is scenario analysis?
300
A diagram that lays out different branches that are the result of different decisions made or the result of different economic situations.
What is a decision tree?
300
1) Each division's relative risk
2) The risk of each project within the divisions
3) The relationship between the total amount of capital raised and the cost of that capital.
What factors must be considered when a firm is developing its optimal capital budget?
400
The situation when a new project reduces cash flows that the firm would otherwise have had.
What is cannibalization?
400
Considers both firm and stockholder diversification. It is measured by the project's beta coefficient.
What is market (beta) risk?
400
A risk analysis technique in which probable future events are simulated on a computer, generating estimated rates of return and risk indexes.
What is Monte Carlo simulation?
400
The difference between the expected NPVs with and without the relevant option.
What is option value?
400
A comparison of actual versus expected results for a given capital project.
What is a post-audit?
500
A cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected.
What is a sunk cost?
500
The cost of capital appropriate for a given project, given the riskiness of that project.
What is the risk-adjusted cost of capital?
500
1) Sensitivity Analysis
2) Scenario Analysis
3) Monte Carlo simulation
What are three techniques used to assess stand-alone risk?