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10 Cards in this Set
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Accounting rate of return |
Rate used to evaluate the acceptability of an investment; equals the after-tax periodic income from a project divided by the average investment in the asset; also called rate of return on average investment. |
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Annuity |
Series of equal payments at equal intervals. |
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Capital Budgeting |
Process of analyzing alternative investments and deciding which assets to acquire or sell |
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Cost of capital |
Rate the company must pay to its long-term creditors and shareholders |
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Internal rate of return (IRR) |
Rate used to evaluate the acceptability of an investment; equals the rate that yields a net present value of zero for an investment. |
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Net present value (NPV) |
Dollar estimate of an asset's value that is used to evaluate the acceptability of an investment; computed by discounting future cash flows from the investment at a satisfactory rate and then subtracting the initial cost of the investment. |
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Payback period (PBP) |
Time-based measurement used to evaluate the acceptability of an investment; equals the time expected to pass before an investment's net cash flows equal its initial cost. |
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Profitability index |
A measure of the relation between the expected benefits of a project and its investment, computed as the present value of expected future cash flows from the investment divided by the cost of the investment; a higher value indicates a more desirable investment, and a value below 1 indicates an unacceptable project. |
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Incremental cost |
Additional cost incurred only if a company pursues a specific course of action. |
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Relevant benefits |
Additional or incremental revenue generated by selecting a particular course of action over another. |
