Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition(^24) Front Matter Preface © The McGraw−Hill
Companies, 2002
9.3 The Discounted Paybac k282
9.4 The Average Accounting Return 285
9.5 The Internal Rate of Return 287
Problems with the IRR 291
Nonconventional Cash Flows 291
Mutually Exclusive Investments 294
Redeeming Qualities of the IRR 296
9.6 The Profitability Index 297
9.7 The Practice of Capital Budgeting 298
9.8 Summary and Conclusions 300
Chapter 10
Making Capital Investment Decisions 311
10.1 Project Cash Flows: A First Loo k312
Relevant Cash Flows 312
The Stand-Alone Principle 312
10.2 Incremental Cash Flows 313
Sunk Costs 313
Opportunity Costs 313
Side Effects 314
Net Working Capital 314
Financing Costs 314
Other Issues 314
10.3 Pro Forma Financial Statements and Project
Cash Flows 315
Getting Started: Pro Forma Financial
Statements 315
Project Cash Flows 317
Project Operating Cash Flow 317
Project Net Working Capital and Capital Spending 317
Projected Total Cash Flow and Value 318
10.4 More on Project Cash Flow 319
A Closer Look at Net Working Capital 319
Depreciation 322
Modified ACRS Depreciation (MACRS) 322
Book Value versus Market Value 323
An Example: The Majestic Mulch and Compost
Company (MMCC) 325
Operating Cash Flows 325
Change in NWC 325
Capital Spending 325
Total Cash Flow and Value 328
Conclusion 328
10.5 Alternative Definitions of Operating
Cash Flow 331
The Bottom-Up Approach 331
The Top-Down Approach 332
The Tax Shield Approach 332
Conclusion 333
10.6 Some Special Cases of Discounted Cash Flow
Analysis 333
Evaluating Cost-Cutting Proposals 333
Setting the Bid Price 335
Evaluating Equipment Options with Different
Lives 337
10.7 Summary and Conclusions 339
Chapter 11
Project Analysis and Evaluation 349
11.1 Evaluating NPV Estimates 349
The Basic Problem 350
Projected versus Actual Cash Flows 350
Forecasting Risk 350
Sources of Value 351
11.2 Scenario and Other What-If Analyses 351
Getting Started 352
Scenario Analysis 353
Sensitivity Analysis 354
Simulation Analysis 355
11.3 Break-Even Analysis 356
Fixed and Variable Costs 356
Variable Costs 356
Fixed Costs 358
Total Costs 358
Accounting Break-Even 360
Accounting Break-Even: A Closer Look 360
Uses for the Accounting Break-Even 362
11.4 Operating Cash Flow, Sales Volume, and
Break-Even 363
Accounting Break-Even and Cash Flow 363
The Base Case 363
Calculating the Break-Even Level 363
Payback and Break-Even 364
Sales Volume and Operating Cash Flow 364
Cash Flow, Accounting, and Financial Break-Even
Points 365
Accounting Break-Even Revisited 365
Cash Break-Even 365
Financial Break-Even 366
Conclusion 366
11.5 Operating Leverage 368
The Basic Idea 368
Implications of Operating Leverage 368
Measuring Operating Leverage 368
Operating Leverage and Break-Even 370
11.6 Capital Rationing 371
Soft Rationing 371
Hard Rationing 371
11.7 Summary and Conclusions 372
xxiv CONTENTS