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23 Cards in this Set
- Front
- Back
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capital investment
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major up-front investment that is expected to pay off in the future in the form of either increased revenue or cost savings
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capital budgeting
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decision-making to help manager make decisions about investments in major capital assets (new facilities, equipment, new products, research and development)
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screening decisions
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require managers to determine whether a proposed capital investment meets minimum criteria
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preference decisions
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require managers to evaluate and compare more than one capital investment alternative
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non-discounting capital budgeting methods
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accounting rate of return and payback period
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discounting cash flow methods
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net present value, internal rate of return, and profitability index
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accounting rate of return
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tells manager how much net income a potential project is expected to generate as a relative percentage of the investment required
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accounting rate of return formula
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net income/initial investment
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calculate net cash flow from net income
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net income+ depreciation= net cash flow
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payback period
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the amount of time it takes for a capital investment to pay for itself
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payback period formula
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initial investment/annual cash flow
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time value of money
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the value of a dollar changes over time because it can be invested to earn interest
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compounding
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where interest is earned on top of interest
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future value
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we know how much money we have today but need to know how much it will be worth in the future
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present value
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we know how much money we will receive in the future but need to know what that money is worth in today's dollars
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discounting
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backing out the interest earned to determine the equivalent value in today's dollars
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annuity
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a stream of cash flows that occur uniformly across time
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net present value
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compares the present value of a project's future cash inflows to the PV of the cash outflows
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discount rate
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rate used to discount future cash flows to reflect the time value of money
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cost of capital
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averaging the after-tax cost of debt ( interest paid on debt) and the cost of equity (return that investors require to exchange for the risk they take by investing in the company's stock)
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internal rate of return
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rate of return that yields a zero net present value
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profitability index
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the ratio of a project's benefits to its costs
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profitability index formula
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present value of future cash flows/initial investment
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