Openlca include flows in product system
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Because cash flows and other assumptions are estimates of future events, it's helpful to change the variables by certain percentage points above and below the estimates to determine the sensitivity (riskiness) of the variable. Sensitivity analysis is a risk analysis technique that measures changes in the IRR and NPV as individual variables are changed. Estimating the incremental cash flows is one of the most important steps in capital budgeting. In evaluating a capital project, only the cash flows that result directly from the decision to accept the project should be included in the analysis.
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Incremental cash flows are cash flows that the asset or project is expected to generate over its life. It is assessed from the standpoint of a well-diversified stockholder. Beta risk is measured by the project's beta coefficient. Corporate risk is the measure of the project's effect on the firm's risk or how much the firm's overall riskiness changes as a result of accepting the project. Diversification can eliminate this type of risk. Stand-alone risk is a project's risk without factoring in the impact of diversification. This may be a difficult concept for management to understand. A sunk cost is not relevant, because the cost has already been incurred, and acceptance of the project should be based on incremental future cash flows. It includes the project's disposal value and related tax effects and the cost of returning the firm's operating assets to the state they were in without the project.Ī sunk cost is a cost that has been incurred and may be related to a project but should not be part of the decision to accept or reject the project.
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A terminal cash flow is the cash flow that occurs at the end of the project's life.