CPA Advanced Level
Advanced Financial Management glossary
Every term this guide defines, A to Z, each with the chapter that teaches it. Open it when a word in a question is unfamiliar, and test yourself on it in the last week: cover the definition and say it in one sentence.
19 terms from the free first chapter
A
- Abandonment option
The option to withdraw from a project if it underperforms.
Taught in Advanced capital budgeting decisions
C
- Certainty equivalent method
Adjusts the risky cash flows themselves downward to their risk-free equivalent value, then discounts at the risk-free rate.
Taught in Advanced capital budgeting decisions
- Challenges in using real options
Difficulty in quantifying option values precisely, and the added complexity relative to standard NPV analysis.
Taught in Advanced capital budgeting decisions
- Characteristics of real options
Represent managerial flexibility to adapt a decision as new information arrives, adding value beyond a static NPV calculation.
Taught in Advanced capital budgeting decisions
D
- Decision trees
Map sequential decisions and chance events (see CPA Quantitative Analysis), solved by working backward from final payoffs.
Taught in Advanced capital budgeting decisions
E
- Equivalent annual annuity approach
Converts each project's NPV into an equivalent constant annual amount over its own life, allowing direct comparison between projects of different durations.
Taught in Advanced capital budgeting decisions
- Expected Monetary Value (EMV)
The probability-weighted average of possible NPV outcomes (see CPA Quantitative Analysis), giving a single risk-adjusted expected value.
Taught in Advanced capital budgeting decisions
M
- Multi-period capital rationing with divisible investments
Extends the same logic across multiple periods with budget constraints in each, typically solved using linear programming (see CPA Quantitative Analysis).
Taught in Advanced capital budgeting decisions
O
- Option to redeploy
The option to switch a project's resources to an alternative use.
Taught in Advanced capital budgeting decisions
R
- Replacement chain analysis
Extends each project through repeated replications until a common time horizon is reached, then compares total NPV over that common horizon.
Taught in Advanced capital budgeting decisions
- Risk-adjusted discount rate (RADR)
Adjusts the discount rate upward for riskier projects, a higher rate for higher risk, before computing NPV.
Taught in Advanced capital budgeting decisions
S
- Scenario analysis
Tests NPV under defined combinations of changes to multiple variables simultaneously (e.g. a 'worst case' and 'best case' scenario).
Taught in Advanced capital budgeting decisions
- Sensitivity analysis
Tests how NPV changes as one input variable (e.g. sales volume) changes at a time, identifying which variable the decision is most sensitive to.
Taught in Advanced capital budgeting decisions
- Simulation analysis
Uses repeated random sampling (e.g. Monte Carlo simulation) across the probability distributions of multiple variables to generate a full distribution of possible NPV outcomes.
Taught in Advanced capital budgeting decisions
- Single-period capital rationing with divisible projects
Rank projects by profitability index (see CPA Financial Management) and select the combination maximising total NPV within the available budget.
Taught in Advanced capital budgeting decisions
- Standard deviation and coefficient of variation
Measure the dispersion of possible outcomes around the expected value, and, via coefficient of variation, allow risk comparison between projects of different scale (see CPA Financial Management).
Taught in Advanced capital budgeting decisions
- Strategic (expansionary) option
The option to expand a project if it succeeds.
Taught in Advanced capital budgeting decisions
T
- Timing option
The option to delay a project until conditions are more favourable.
Taught in Advanced capital budgeting decisions
U
- Utility analysis
Incorporates the decision-maker's own risk attitude (risk-averse, risk-neutral, risk-seeking) into the evaluation, rather than relying on expected value alone.
Taught in Advanced capital budgeting decisions
The full glossary adds every term from the other 10 chapters, A to Z, each with the chapter that teaches it.