Question

Write a short journal that addresses the following concepts: incremental cash flow; sunk cost; opportunity cost; externality ; cannibalization; stand-alone risk; sensitivity analysis; base-case NPV; scenario analysis; base-case scenario; worst-case scenario; best-case scenario.

Answer 1

Incremental cash flows are the cash flows which will be generated after undertaking of a project and this will be the basis for decision making.

sunk cost are all such costs which are irrelevant for decision making and which has been incurred in the past.

Opportunity cost is the cost of opportunity which has been given up by the company and this is the cost of alternate next best investment.

EXTERNALITIES is benefit to the third party or loss to the third party who is not a party to the contract like education benefits the society

Cannibalization is reduction in sales of existing product due to introduction of the new products by the same company

Stand alone risk is the risk which is specifically related to a particular project

Sensitivity analysis is the analysis of change in the dependent variable due to change in independent variable

Best case net present value is net present value which is adjusted for the financing cost.

Scenario analysis analysis of the project in various different scenario by interpretation of different variables

Base case scenario is average scenario based on management admissions

worst case scenario is the worst exemptions made by the management and it is the worst performance which can possibly occur

best case scenario is the best performance which can possibly occur by the company