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19 Cards in this Set

  • Front
  • Back
6 Stages of Capital Budgeting
1) Identification Stage
2)Search Stage
3)Information-Acquisition Stage
4)Selection Stage
5)Financing Stage
6)Implementation and Control Stage
Identification Stage
Management determines the type of capital projects that are necessary to achieve mgt's objectives.
Search Stage
MGT attempts to identify alternative capital investments that will achieve MGT's objectives.
Information-Acquisition Stage
MGT attempts to revaluate the various investments in terms of their costs and benefits.
Selection Stage
MGT chooses the projects that best meet the criteria established.
Financing Stage
MGT decides on the best source of funding for the project.
Implementation and Control Stage
MGT undertakes the project and monitors the performance of the investment.
Sunk Costs
are committed costs that are unavoidable and are therefore irrelevant to the decision process.
Avoidable Costs
costs that will not continue to be incurred if a dept. or product is terminated.
Committed Costs
arise from a company's basic commitment to open its doors and engage in business. (prop taxes, MGT salaries)
Discretionary Costs
fixed costs whose level is set by current MGT decisions. (R&D)
Relevant Costs
future costs that will change as a result of a specific decision.
Differential Cost
the diference in cost between two alternatives.
Opportunit Cost
the maximum income or savings foregone by rejecting an alternative.
Outlay cost
is the cash disbursement associated with a specific project.
Payback Method
Know Calculation
evaluates investments on the length of time until recapture of the investment.
Discounted Payback
Know Calculation
Same as payback, except that cash flows are first discounted to their present value. Does not consider total project profability.
Accounting Rate of Return
computes an approximate rate of return which ignores the time value of money.

ARR=Annual Net Income/Average or (Initial) Investment
NPV=(Present value of future cash flows)-(required investment)