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11 Cards in this Set

  • Front
  • Back

capital investment decision

decision made concerning deployment of capital

acquisition, replacement, or expansion


net present value is incremental cash inflow minus incremental cash outflow over project life

payback analysis

measure amount of time it takes to pay back initial investment, standard is arbitrary, ignores cash flows beyond payback and TVM


internal rate of return: comparing NPV to WACC, accept project if NPV>0, sometimes meaningful NPV cannot be calculated

NPV calculator steps

NPV(R%,CF0,{CF list},{CF frequency})

IRR calculator steps

IRR(CF0,{CF list},{CF frequency})

importance of capital budgeting

long term effects


substantial expenditures

notable problems in cash flow

sunk costs

opportunity costs

externalities (effects on rest of firm)

shipping and installation costs


types of cash flows

initial investment: occur at beginning

supplemental operating cash flows: from purchase to disposal

terminal cash flows: occur at end of life

payback period calculations undiscounted

(# of years before year of full recovery)+ (amount unrecovered at start of recovery year/ total cash flow generated during recovery year)

payback period discounted

same as undiscounted but with NPV of net cash flow