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Cash Flow Analysis

The activity of establishing cash flow (dollars in and out of the project) by month and the accumulated total cash flow for the project for the measurement of actual versus the budget costs. This is necessary to allow for funding of the project at the lowest carrying charges and is a method of measuring project progress.

Capital Budgeting

The process of determining whether or not projects such as building a new plant or investing in a long-term venture are worthwhile. Also known as "investment appraisal". Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period.

Capital Structure

A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered.

Cash Flow

The planning of project expenditures relative to income in such a way as to minimize the carrying cost of the financing for the project. This maybe achieved by delaying some of


the major activities, but only at the risk of late completion and consequent increased cost.

Cost Benefit Analysis

An analysis of the relationship between the costs of undertaking a task or project, initial and recurrent, and the benefits likely to arise from the changed situation, initially and recurrently. Note: The hard tangible, readily measurable benefits may sometimes be accompanied by soft benefits which may be real but difficult to isolate, measure and value. The analysis allows comparison of the returns from alternative forms of investment. The analysis of the potential costs and benefits of a project which allows comparison of the returns from alternative forms of investment.

Cost of Capital

The required return necessary to make a capital budgeting project - such as building a new factory - worthwhile. Cost of capital would include the cost of debt and the cost of equity. The cost of capital determines how a company can raise money (through a stock issue, borrowing, or a mix of the two). This is the rate of return that a firm would receive if it invested its money someplace else with similar risk.

Cost of Debt

The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity. A company will use various bonds, loans and other forms of debt, so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. The measure can also give investors an idea as to the riskiness of the company compared to others, because riskier companies generally have a higher cost of debt. To get the after-tax rate, you simply multiply the before-tax rate by one minus the marginal tax rate (before-tax rate x (1-marginal tax)). If a company's only debt were a single bond in which it paid 5%, the before-tax cost of debt would simply be 5%. If, however, the company's marginal tax rate were 40%, the company's after-tax cost of debt would be only 3% (5% x (1-40%)).


formula is the dividend capitalization model: (see picture)

A firm's cost of equity

Cost of Equity

represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership. Let's look at a very simple example: let's say you require a rate of return of 10% on an investment in TSJ Sports. The stock is currently trading at $10 and will pay a dividend of $0.30. Through a combination of dividends and share appreciation you require a $1.00 return on your $10.00 investment. Therefore the stock will have to appreciate by $0.70, which, combined with the $0.30 from dividends, gives you your 10% cost of equity. The capital asset pricing model (CAPM) is another method used to determine cost of equity.

Cost Performance Indicator ("CPI")

The ratio of BCWP to ACWP. A positive value (i.e. greater than 1) indicates that costs are running under budget. A negative value (i.e. less than 1) indicates that costs are running over budget i.e. CPI = BCWP / ACWP ; BCWP= Budgeted cost of work performed; ACWP = Actual cost of work performed

Cost Plus Fixed Fee Contract ("CPFF")

A type of contract where the buyer reimburses the seller for the seller's allowable costs plus a fixed fee. A form of contractual arrangement in which the customer agrees to reimburse the contractor's actual costs, regardless of amount, and in addition pay a negotiated fee independent of the amount of the actual costs.

Cost Plus Incentive Fee Contract ("CPIFC")

A type of Contract where the buyer reimburses the seller for the seller's allowable costs and the seller earns a profit if defined criteria are met. A form of contractual arrangement similar to CPFF except that the fee is not preset or fixed but rather depends on some specified result, such as timely delivery.

Cost Plus Percentage


of Cost Contract

Provides reimbursement of allowable cost of services performed plus an agreed upon


percentage of the estimated cost as profit.


The decrease in value of tangible property (without loss of property) due to causes such as wear, tear, age, and obsolescence.A charge to current operations which distributes the cost of a tangible capital asset, less estimated residual value, over the estimated useful life of the asset in a systematic and logical manner. It does not involve a process of valuation.

Dept/Equity Ratio

instead of total liabilities in the calculation. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

Discount Rate

s future. The size of the discount rate will affect the appraised viability of those projects to which it is applied. Broadly, the higher the discount rate the lower will be the present value of earnings (or benefits) arising in the future and the greater the negative impacts on project feasibility. The discount rate is determined pragmatically by the sponsor. Ideally it should take account of the sponsor's cost of capital, the rate of inflation, interest rates and rates of return on investments throughout the economy. Note: There is a difference between "real" discount rates and "nominal" discount rates. Real discount rates are used in conjunction with cash flows which are expressed in terms of present-day money values, with no allowance for price inflation. (The cash flows should, however, allow for increments in future over and above price inflation, e.g. real wage increases.) Nominal discount rates, on the other hand, are higher than real discount rates and are applied to cash flows which make specific allowance for future price inflation at an estimated rate

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Discounted Cash Flow

A calculation of present value of a projected cash flow based on some assumed rate of inflation or interest. A method for comparing the relative merits of project investments taking into account the value of money, taxation, varying operating costs, earlier cash returns for reinvestment etc. Also known as Internal Rate of Return. Although theoretically not as sound as Net Present Value, it is easier to present and relate to interest rates on


borrowed money. Neither DCF nor NPV takes into account project risks

Economic Evaluation

The process of establishing the value of a project in relation to other corporate standards/bench marks, project profitability, financing, interest rates and acceptance.

Economic Value

The reasonable economic value expected to be added to an enterprise or one of its



ongoing processes as a result of the project.

Financial Viability

The extent to which a program or project can be justified or sustained financially


Hurdle Rate

The minimum amount of return that a person requires before they will make an investment in something.


Internal Rate of Return ("IRR")

The return which can be earned on the capital invested in the project, i.e. the discount rate which gives an NPV of zero. This is equivalent to the yield on the investment. Simple calculation of annual financial return for a given outlay without consideration of any external or related factors.


Amounts owed under obligations for goods and services received and other assets acquired; includes accruals of amounts earned but not yet due and progress payments due on contracts.

Net Present Value

The difference between the discounted present value of benefits and the discounted present value of costs. When a Rate of Return is applied to the stream of annual cash flows resulting from a project investment, it is possible to calculate whether the discounted value is greater than the cost of the investment. In times of high interest and inflation especially, the method gives more accurate results than simple pay back periods and average return. The difference between the present value of the cash flows generated by a project and its capital cost. It is calculated as part of the process of


assessing and appraising investments.

Project Cost Accounting System

A cost accounting system that accumulates actual costs for projects in such a way that total costs for all work in an organization can be allocated to the appropriate projects, normally providing monthly cost summaries; also used in cost planning to summarize the detailed task cost estimates.


The process of placing responsibility on the designers and implementers to perform within their previously established budgets. Project costs are then collected and reported in a way that Actuals to Budget can be compared, and sound management and technical decisions can be made on the Project. Two simple but essential principles of the process

must be clearly understood: 1. there must be a basis for comparison, and 2. only future

costs can be controlled.

A subset of project management that includes resource

Project Cost

planning, cost estimating, cost control and cost budgeting in an effort to complete the


project within its approved budget

Project Cost Systems

The establishment of a project cost accounting system of ledgers, asset records, liabilities, write-offs, taxes, depreciation expense, raw materials, pre-paid expenses, salaries

Project Initiation Review

A control gate at which the provider executive management reviews, approves, and commits the company to the provider's project plan and approves the project start. The PIR is the forum for executive management to constructively challenge the readiness of the provider project manager and project team to initiate the project effort and successfully meet the project requirements.

Project Risk Analysis

Analysis of the consequences and probabilities that certain undesirable events will occur and their impact on attaining the contract/procurement objectives.

Risk Analysis and Management for Projects ("RAMP")

A comprehensive framework within which risks can be managed effectively and financial values placed upon them. RAMP aims to achieve as much certainty as possible about a long term and uncertain future. In the case of a new project, the RAMP process covers the project's entire lifecycle, from initial conception to eventual termination. The process facilitates risk mitigation and provides a system for the control of the remaining risks. Editor's Note: Be aware of the RAMP definition of "Project" and the extent of its life span

Risk Mitigation

The act of revising the project's scope, budget, schedule or quality, preferably without material impact on the project's objectives, in order to reduce uncertainty on the project.

Risk Quantification

Process of applying values to the various aspects of a risk


Those products, functionality, benefits, etc. resulting from the project that stakeholders look forward to with some degree of certainty, rightly or wrongly. Discrepancies between stakeholder needs, specified requirements, expectations and actual results can be a significant source of dissatisfaction with final project results. Hence the importance of


good stakeholder communication throughout the project.

Top Down Cost Estimating

The preparation of a cost estimate by using judgment and experience to arrive at an overall total amount, usually done by an experienced estimator or manager making a subjective comparison of the project with similar previous projects

Time Value of Money

The time value of money is the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal.

Weighted Average Cost of Capital (WACC)

Broadly speaking, a company’s assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.



Coverage Ratio

In corporate finance, it is the amount of cash flow available to meet annual interest and


principal payments on debt, including sinking fund payments.

Capital Expenditure (CAPEX)

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operation. These expenditures can include everything from repairing a roof to building a brand new factory.

Operating Expense (OPEX)

The essential things that a company must pay for in order to maintain business.




Memorandum of Agreement ("MOA")





A document that describes the background, assumptions, and agreements between two parties. In a contractual agreement, the buyer and seller often create a MOA at the conclusion of contract negotiations.

Any written agreement-in-principle describing how a commitment will be administered. A document that describes an agreement for cooperative effort between two separate organizations