1. An oppertunity cost is the cost of an alternative and what you would lose to persue a different action.
A sunk cost is when you will not be able to get your inital investment back and will suffer a loss.
A relavent cash flow is an after tax cash flow that you are expecting to get from an ivestment.
An incremental cash flow is aditional cash flow that a firm gets buy opening a business at a new location or taking on another project. An example is the lowes example from class.
Stand alone principle is an assumption that the project is evaluated by icremental cash flows of the project.
2. Book value is the is defined as the the value of of a business or firm on the financial statements. Market value is the value of the firm based on the stock market. Market value is computed buy taking the number of oustanding shares multiplyed by the stock price. Both book and market values are useful but market values are what anyalysts use the most when discussing firm values.
3. senerio anyalysis is the process asking what if questions, trying to estimate the how much the value of the firm would decrease in worst case senerio problems.
4. Sensitivity anylaysis is a way to predict the the outcome of a decision if the situation turns out to be different from what was origonally predicted, this is helpful in forcasting risk. Also be said as a variation on a senario.
5. Forcasting risk or estimation risk is the possibility that we will make bad decisons for the firm based on erriors in our projected cash flows.
6. The four categories of real options are to expand, contract, delay and shut down. An example of expand is if we find a project with a good NPV or our demand for sales is high for a product we may consider to expand to meet that demand. An example of shutdown would be if our firm isnt even able to cover the expense it occurs then it may be a good time to shut