Chapter 14 Flashcards
What is capital budgeting?
It is the process of deciding whether or not to commit resources to a particular project based on the expectation of some future benefit.
What is the purpose of capital improvemnets?
It is to increase the value of the owner’s assets by either increasing income or reducing expenses.
What is budgeting capital?
It is a means of setting aside reserves for major expenditures.
What are capital assets?
They are major expenditures such as property, plant, or equipment.
What are REITs?
Real Estate Investment Trusts
They are entities that sell stick and invest proceeds in real estate as its primary business.
What is compounding?
It is the calculation of interest on a principle amouont plus interest on the interest accrued during a previous period.
What is the time value of money?
The notion that a rate of return should be expected from capiatl invetsed over a period of time.
What is discounting?
It is dividing the future value by the sum an interest.
What is capitalization?
It is transferring items purchased for use over time from the cash basis income statement and recording them as assets on the balance sheet.
How is capitalization rate, or rate of return from a given property, determined?
Capitalization Rate=Net Operating Income/Value of the Asset
What is return on equity (ROE)?
The rate of return on common stickholder’s equity.
What is present value?
It is a comparison of the anticiapted cash flow from an investment to the initial investment.
What is net present value?
It is the difference between present value of capital outlays and the present value of all future cash flow benefits.
Define Internal Rate of Return.
It is the rate of return on capital that is generated within an investment over a period of time.
What is the payback period and how is it determined?
It is the time required for money saved or income generated by a project or product to equal its initial investment cost.
Payback Period=investment/annual revenues or savings
