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after reading this chapter, students should be able to:  Discuss difficulties and relevant considerations in estimating net cash
flows, and explain the four major ways that project cash flow differs from accounting income.
 Define the following terms: relevant cash flow, incremental cash flow,
sunk cost, opportunity cost, externalities, and cannibalization.
 Identify the three categories to which incremental cash flows can be
classified.
 Analyze an expansion project and make a decision whether the project
should be accepted on the basis of standard capital budgeting techniques.
 Explain three reasons why corporate risk is important even if a firm’s
stockholders are well diversified.
 Identify two reasons why stand-alone risk is important.  Demonstrate sensitivity and scenario analyses and explain Monte Carlo
simulation.
 Discuss the two methods used to incorporate risk into capital budgeting
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