4162382
Description
Flashcards by Antonio Orange, updated more than 1 year ago
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Created by Antonio Orange
about 9 years ago
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| Question | Answer |
| accounting rate of return (ARR) | the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow |
| annuity | a series of equal cash flows per period |
| annuity due | a series of equal cash flows being received or paid at the beginning of a period. |
| capital asset | an asset used to generate revenues or cost savings by providing production, distribution, or service capabilities lasting for more than one year. |
| capital budgeting. | a process of evaluating an entity's proposed long-range projects or courses of future activity for the purpose of allocating limited resources to desirable projects. |
| cash flow | the receipt or disbursement of cash when related to capital budgeting, cash flows arise from the purchase, operation and disposition of a capital asset |
| compound interest | a method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest. |
| compounding period | the time between interest computation. |
| Cost of Capital (COC) | the weighted average cost of the various sources of funds that comprise a firm's financial structure. |
| Discount Rate | the rate of return used to discount future cash flows to their present value amounts; should equal or exceed an organization's weighted average cost of capital. |
| Discounting | the process of reducing future cash flows to present value amounts |
| hurdle rate | a reestablished rate of return against which other rates of return are measured; is usually the cost of capital rate when used in evaluating capital projects. |
| financing decision | a judgement made regarding the method of raising funds that will be used to make acquisitions; is based on an entity's ability to issues and service debt and equity securities. |
| Future Value (FV) | the amount to which one or more sums of money invested at a specified interest rate will grow over a specified number of compounding periods. |
| Hurdle Rate | k |
| independent projects | an investment project that has no specific bearing on any other investment project. |
| internal rate of return IRR | the expected or actual rate of return from a project based on respectively the assumed or actual cash flows; the discount rate at which the net present value of the cash flows equals zero. |
| investment decision | a judgement about which assets will be acquired by an entity to achieve its stated objectives. |
| judgmental method | an informal method of adjusting for risk that allows the decision maker to use logic and reason to decide whether a project provides an acceptable rate of return. |
| mutually inclusive project | an interrelated series of capital investment the must all be chosen if the primary investment is selected. Often within mutually inclusive business deals, one event must proceed another for the latter to move forward. |
| mutually exclusive project. | when accepting one investment means rejecting other investment opporunties. |
| net present value NPV | the difference between the present values of all cash inflows and outflows for an investment project |
| net present value method | a process that uses the discounted cash flows of a project to determine whether the rate of return on that project is equal to higher than or lower than the desired rate of return. |
| ordinary annunity | a series of equal cash flows being received or paid at the end of a period |
| payback period | the time required to recoup an original investment through cash flows from a project. |
| post investment audit | the process of gathering information on the actual results of a capital project and comparing them to the expected results. |
| preference decision | the second decision made in capital project evaluation in which projects are ranked according to their impact on the achievement of company objectives |
| present value | the amount that one or more future cash flows is worth currently given a specified rate of interest |
| profitability index | a ratio that compares the present value of net cash flows to the present value of the net investment |
| reinvestment assumptions | an assumption made about the rate of return that will be earned by intermediate cash flows from a capital project; the net present value and profitability index assume reinvestment at the discount rate; the internal rate of return assumes reinvestment at the IRR. |
| return on capital | the recovery of the original investment in a project. |
| risk-adjusted discount rate method | a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash in flows to compensate for increased risk. |
| Risk | a situation involving exposure to danger. |
| screening decision | the first decision made in evaluating capital projects; indicates whether a project is desirable based on some previously established minimum criterion or criteria. |
| Sensitivity analysis | a process of determining the amount of change that must occur in a variable before a different decision would be made. |
| simple interest | interest is earned only on the original investment or principal amount. |
| tax benefit | equal to the amount of taxes saved. |
| tax shield | is the reduction in income taxes that results from taking an allowable deduction from taxable income |
| timeline | illustrates the points in time when projected cash flows are received or paid, making it a helpful tool for analyzing cash flows of a capital investment proposal. |
| time value of money | idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. |
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