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21 Cards in this Set
- Front
- Back
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Annual rate of return technique
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Determines the profitability of a capital expenditure by dividing expected annual net income by the average investment.
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Capital budgeting
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The process of making capital expenditure decisions in business.
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Cash payback technique
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Identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment.
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Cost of capital
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The rate of return that management expects to pay on all borrowed and equity funds.
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Discount rate
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Interest rate used in discounting the future net cash flows.
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Discounted cash flow technique
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Considers both the estimated total net cash flows from the investment and the time value of money.
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Incremental analysis
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The process of identifying the financial data that change under alternative courses of action.
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Internal rate of return (IRR)
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The rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows.
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Internal rate of return method
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Finds the interest yield of the potential investment.
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Net present value (NPV)
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The difference that results when the original capital outlay is subtracted from the discounted net cash flows
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Net present value method
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Discounts net cash flows to their present value and then compares that present value to the capital outlay required by the investment.
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Opportunity cost
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The potential benefit that may be obtained from following an alternative course of action.
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Sunk cost
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A cost that cannot be changed by any present or future decision.
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Annuity
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A series of equal dollar amounts to be paid or received periodically.
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Compound interest
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The interest computed on the principal and any interest earned that has not been paid or withdrawn.
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Discounting the future amount(s)
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The process of determining present value.
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Interest
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Payment for the use of another's money.
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Present value
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The value now of a given amount to be paid or received in the future assuming compound interest.
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Present value of an annuity
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The value now of a series of future receipts or payments, discounted assuming compound interest.
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Principal
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The amount borrowed or invested.
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Simple interest
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The interest computed on the principal only.
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