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Definition of Project

Project Image 1

Project

An investment opportunity for a company


project

the purchase, installation, and operation of a capital asset



Related Terms:

Conventional project

A project with a negative initial cash flow (cash outflow), which is expected to be
followed by one or more future positive cash flows (cash inflows).


Independent project

A project whose acceptance or rejection is independent of the acceptance or rejection of
other projects.


Project loan certificate (PLC)

A primary program of Ginnie Mae for securitizing FHA-insured and coinsured
multifamily, hospital, and nursing home loans.


Project loan securities

Securities backed by a variety of FHA-insured loan types - primarily multi-family
apartment buildings, hospitals, and nursing homes.


Project loans

Usually FHA-insured and HUD-guaranteed mortgages on multiple-family housing complexes,
nursing homes, hospitals, and other development types.


Project notes (PNs)

project notes are issued by municipalities to finance federally sponsored programs in
urban renewal and housing and are guaranteed by the U.S. Department of Housing and Urban Development.
project financing A form of asset-based financing in which a firm finances a discrete set of assets on a standalone
basis.
projected benefit obligation (PBO) A measure of a pension plan's liability at the calculation date assuming
that the plan is ongoing and will not terminate in the foreseeable future. Related:accumulated benefit obligation.


Project Image 2

Projected maturity date

With CMOs, final payment at the end of the estimated cash flow window.


Independent Projects

A situation where an increase (or decrease) in the benefits of one
project has no effect on the benefits of another project. Also, a
situation where the acceptance of one project does not preclude
the acceptance of another project.


independent project

an investment project that has no specific
bearing on any other investment project


mutually exclusive projects

a set of proposed capital projects from which one is chosen, causing all the others to be rejected


mutually inclusive projects

a set of proposed capital projects that are all related and that must all be chosen if the primary project is chosen


total expected value (for a project)

the sum of the individual cash flows in a probability distribution multiplied by their related probabilities


mutually exclusive projects

Two or more projects that cannot be pursued simultaneously.


project cost of capital

Minimum acceptable expected rate of return on a project given its risk.


Make-Work Project

A project, such as digging holes and filling them up again, that has no useful purpose other than to make work.


Projected available balance

The future planned balance of an inventory item,
based on the current balance and adjusted for planned receipts and usage.


Project Financing

Debt finance, usually non-recourse, provided by financial institutions for the development and construction of a new project.


Projection

Future-oriented financial information prepared using assumptions that reflect the entity's planned courses of action for the period.


Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.


Accumulated Benefit Obligation (ABO)

An approximate measure of the liability of a plan in the event of a
termination at the date the calculation is performed. Related: projected benefit obligation.


All equity rate

The discount rate that reflects only the business risks of a project and abstracts from the
effects of financing.


Appropriation request

Formal request for funds for capital investment project.


Assets requirements

A common element of a financial plan that describes projected capital spending and the
proposed uses of net working capital.


Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.


BAN (Bank anticipation notes)

Notes issued by states and municipalities to obtain interim financing for
projects that will eventually be funded long term through the sale of a bond issue.


Basic IRR rule

Accept the project if IRR is greater than the discount rate; reject the project is lower than the
discount rate.


Bootstrapping

A process of creating a theoretical spot rate curve , using one yield projection as the basis for
the yield of the next maturity.


Break-even analysis

An analysis of the level of sales at which a project would make zero profit.


Cash deficiency agreement

An agreement to invest cash in a project to the extent required to cover any cash
deficiency the project may experience.


Competence

Sufficient ability or fitness for ones needs. Possessing the necessary abilities to be qualified to
achieve a certain goal or complete a project.


Completion risk

The risk that a project will not be brought into operation successfully.


Completion undertaking

An undertaking either (1) to complete a project such that it meets certain specified
performance criteria on or before a certain specified date or (2) to repay project debt if the completion test
cannot be met.


Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.


Cost of capital

The required return for a capital budgeting project.


Crossover rate

The return at which two alternative projects have the same net present value.


Dependent

Acceptance of a capital budgeting project contingent on the acceptance of another project.


Discretionary cash flow

Cash flow that is available after the funding of all positive NPV capital investment
projects; it is available for paying cash dividends, repurchasing common stock, retiring debt, and so on.


Dividend clawback

With respect to a project financing, an arrangement under which the sponsors of a project
agree to contribute as equity any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.


Economic dependence

Exists when the costs and/or revenues of one project depend on those of another.


Economic risk

In project financing, the risk that the project's output will not be salable at a price that will
cover the project's operating and maintenance costs and its debt service requirements.


Equity contribution agreement

An agreement to contribute equity to a project under certain specified
conditions.


Equivalent annual benefit

The equivalent annual annuity for the net present value of an investment project.


Expected future cash flows

projected future cash flows associated with an asset of decision.


Extrapolative statistical models

Models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.


Financial planning

The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.


Force majeure risk

The risk that there will be an interruption of operations for a prolonged period after a
project finance project has been completed due to fire, flood, storm, or some other factor beyond the control
of the project's sponsors.


Forward rate

A projection of future interest rates calculated from either the spot rates or the yield curve.


Growth opportunity

Opportunity to invest in profitable projects.


Hell-or-high-water contract

A contract that obligates a purchaser of a project's output to make cash
payments to the project in all events, even if no product is offered for sale.


Incremental cash flows

Difference between the firm's cash flows with and without a project.


Incremental internal rate of return

IRR on the incremental investment from choosing a large project
instead of a smaller project.


Intermarket spread swaps

An exchange of one bond for another based on the manager's projection of a
realignment of spreads between sectors of the bond market.


International Bank for Reconstruction and Development - IBRD or World Bank

International Bank for Reconstruction and Development makes loans at nearly conventional terms to countries for projects of high
economic priority.


Investment product line (IPML)

The line of required returns for investment projects as a function of beta
(nondiversifiable risk).


Multiple rates of return

More than one rate of return from the same project that make the net present value
of the project equal to zero. This situation arises when the IRR method is used for a project in which negative
cash flows follow positive cash flows. For each sign change in the cash flows, there is a rate of return.


Municipal bond

State or local governments offer muni bonds or municipals, as they are called, to pay for
special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.


Mutually exclusive investment decisions

Investment decisions in which the acceptance of a project
precludes the acceptance of one or more alternative projects.


Net present value rule

An investment is worth making if it has a positive NPV. projects with negative NPVs
should be rejected.


Net salvage value

The after-tax net cash flow for terminating the project.


Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in
comparable financial securities.


Payback

The length of time it takes to recover the initial cost of a project, without regard to the time value of money.


Planning horizon

The length of time a model projects into the future.


Postponement option

The option of postponing a project without eliminating the possibility of undertaking it.


Pro forma capital structure analysis

A method of analyzing the impact of alternative capital structure
choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will
be able to use projected tax shield benefits fully.


Pro forma financial statements

Financial statements as adjusted to reflect a projected or planned transaction.


Pro forma statement

A financial statement showing the forecast or projected operating results and balance
sheet, as in pro forma income statements, balance sheets, and statements of cash flows.


Production payment financing

A method of nonrecourse asset-based financing in which a specified
percentage of revenue realized from the sale of the project's output is used to pay debt service.


Progress review

A periodic review of a capital investment project to evaluate its continued economic viability.


Purchase agreement

As used in connection with project financing, an agreement to purchase a specific
amount of project output per period.


Raw material supply agreement

As used in connection with project financing, an agreement to furnish a
specified amount per period of a specified raw material.


Replacement-chain problem

Idea that future replacement decisions must be taken into account in selecting
among projects.


Revenue bond

A bond issued by a municipality to finance either a project or an enterprise where the issuer
pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital
revenue bonds and sewer revenue bonds.


Risk classes

Groups of projects that have approximately the same amount of risk.


Scale enhancing

Describes a project that is in the same risk class as the whole firm.


Scenario analysis

The use of horizon analysis to project bond total returns under different reinvestment rates
and future market yields.


Sensitivity analysis

Analysis of the effect on a project's profitability due to changes in sales, cost, and so on.


Separation theorem

The value of an investment to an individual is not dependent on consumption
preferences. All investors will want to accept or reject the same investment projects by using the NPV rule,
regardless of personal preference.


SIC

Abbreviation for Standard Industrial Classification. Each 4-digit code represents a unique business activity.
Side effects Effects of a proposed project on other parts of the firm.


Stand-alone principle

Investment principle that states a firm should accept or reject a project by comparing it
with securities in the same risk class.


Surplus funds

Cash flow available after payment of taxes in the project.


Tandem programs

Under Ginnie Mae, mortgage funds provided at below-market rates to residential
mortgage buyers with FHA Section 203 and 235 loans and to developers of multifamily projects with Section
236 loans initially and later with Section 221(d)(4) loans.


Tax clawback agreement

An agreement to contribute as equity to a project the value of all previously
realized project-related tax benefits not already clawed back to the extent required to cover any cash
deficiency of the project.


Turnkey construction contract

A type of construction contract under which the construction firm is
obligated to complete a project according to prespecified criteria for a price that is fixed at the time the
contract is signed.


Value additivity principal

Prevails when the value of a whole group of assets exactly equals the sum of the
values of the individual assets that make up the group of assets. Stated differently, the principle that the net
present value of a set of independent projects is just the sum of the net present values of the individual projects.


World Bank

A multilateral development finance agency created by the 1944 Bretton Woods, New
Hampshire negotiations. It makes loans to developing countries for social overhead capital projects, which are
guaranteed by the recipient country. See: International Bank for Reconstruction and Development.


Planning, programming and budgeting system (PPBS)

A method of budgeting in which budgets are allocated to projects or programmes rather than to responsibility centres.


Internal Rate of Return (IRR)

The discount rate that equates the present value of the net cash
inflows with the present value of the net cash outflows
(investments). The IRR measures the profitability (rate of return) of
an investment in a project or security.


Risk Premium

The additional rate of return required on a risky project
(investment) when compared to a risk-free project (investment)


accounting rate of return (ARR)

the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow


capital budgeting

a process of evaluating an entity’s proposed
long-range projects or courses of future activity for
the purpose of allocating limited resources to desirable
projects


coefficient of variation

a measure of risk used when the standard deviations for multiple projects are approximately
the same but the expected values are significantly different


cost accounting

a discipline that focuses on techniques or
methods for determining the cost of a project, process, or
thing through direct measurement, arbitrary assignment, or
systematic and rational allocation


cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a
project)


design for manufacturability (DFM)

a process that is part of the project management of a new product; concerned with finding optimal solutions to minimizing product failures
and other adversities in the delivery of a new product
to customers


expected capacity

a short-run concept that represents the
anticipated level of capacity to be used by a firm in the
upcoming period, based on projected product demand


Fisher rate

the rate of return that equates the present values
of the cash flows of all projects being considered; it is the
rate of indifference


hurdle rate

a preestablished rate of return against which
other rates of return are measured; it is usually the cost of
capital rate when used in evaluating capital projects


internal rate of return (IRR)

the expected or actual rate of
return from a project based on, respectively, the assumed
or actual cash flows; the discount rate at which the net
present value of the cash flows equals zero


 

 

 

 

 

 

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