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Question (11-1): Define each of the following terms:
a. Project cash flow; accounting income
b. Incremental cash flow; sunk cost; opportunity cost; externality; cannibalization; expansion project; replacement project
c. Net operating working capital changes; salvage value
d. Stand-alone risk; corporate (within-firm) risk; market (beta) risk
e. Sensitivity analysis; scenario analysis; Monte Carlo simulation analysis.
f. Risk-adjusted discount rate; project cost of capital
g. Decision tree; staged decision-tree analysis; decision node; branch
h. Real options; managerial options; strategic options; embedded options
i. Investment timing option; growth option; abandonment option; flexibility option
a. Project cash flow: The process of inflow or outflow of cash in any project is called cash flow. In project cash flow the increase in income results cash inflow on the other hand, expenditure results cash outflow.
Accounting income: Accounting income is the result after deducting the total sales revenue from its expenses. The result of accounting income and cash flow differs in the financial statement because accounting income makes records of both cash and non cash transaction. While in cash flow only pure cash transaction are recorded.
b) Incremental cash flow:
Incremental cash flow is the additional cash that company may receive by taking a new project. If a company sees positive incremental of cash flow then it means the company can get additional cash flow in future, if new project is accepted.
Sunk cost: The cost that has already been recorded as incurred and which cannot be recovered is called sunk cost.
Opportunity cost: The cost that is given up when choosing another alternative project is called opportunity cost.
Externality:
Externality is the result that has an effect on the other external parties of the organization. It can

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