Chapter 12 Flashcards
Accounting return on investment (AROI)
The profit from an investment as a percentage of the investment outlay
Criterion
A decision rule used to evaluate acceptability of a proposed investment
Payback period
The number of years to recover, through operating cash flows, the money spent for an investment outlay
Net present value (NPV)
The present value of all cash flows pertaining to a project minus the investment outlay. Measures the value added to a firm as a result of undertaking a project
Economic value added (EVA)
An alternative performance measure that takes into account cash flows and the total cost of debt and equity in order to measure annual value added
Equity residual net present value, NPV(ER)
An alternative calculation of NPV, measuring the present value of equity cash flows pertaining to a project, minus te equity investment outlay
Internal rate of return (IRR)
The percentage return that discounts all cash flows from a project, including the investment outlay, to zero
Mutually exclusive
Alternatives where only one can be accepted; an either/or decision
Capital rationing
A condition of insufficient funding to undertake all desirable investment projects
Sensitivity analysis
A risk assessment technique that changes one or two variables at a time to determine the effect of an outcome
Risk-adjusted required return (RARR)
A risk-adjustment technique that adjusts the discount rate applied to projects’ cash flows in order to compensate for risk
