Chapter 24

Question 1

accounting rate of return

Answer 1

A project evaluation tool that focuses on accounting income rather than cash flows; average annual increase in income by the amount of initial investment.

Question 2

annuity

Answer 2

Level streams of payments; with each payment being the same, and occurring at a regular interval

Question 3

annuity due

Answer 3

Also known as an annuity in advance; involves a level stream of payments, with the payments being made at the beginning of each time period

Question 4

capital expenditure decision

Answer 4

Also known as capital budgeting; planning and decision making related to longer term projects and expenditures

Question 5

future value

Answer 5

Or “compound interest;” amount that a current payment (or stream of payments) will grow in time; includes interest on previous interest based on frequency of compounding

Question 6

internal rate of returen

Answer 6

Also known as time-adjusted rate of return or IRR; discount rate causing present value of cash inflows to equal present value of the cash outflows

Question 7

net present value

Answer 7

Or NPV, a method of evaluating capital projects that uses a predetermined interest rate to determine the present value of an investment’s net cash inflows and outflows

Question 8

opportunity cost

Answer 8

The cost of a foregone alternative; may include lost revenue

Question 9

ordinary annuity

Answer 9

Also know as Also known as an annuity in arrears; involves a level stream of payments, with the payments being made at the end of each time period.

Question 10

outsourcing

Answer 10

Utilization of independent parties to manufacture products (sometimes known as make-or-buy) or manage data processing, tech support, payroll services, etc.

Question 11

payback

Answer 11

Easly method for evaluating capital projects; calculated by dividing the initial investment by the annual cash inflow.

Question 12

present value

Answer 12

Also known as discounting; determines the current worth of cash to be received in the future.

Question 13

relevant cost

Answer 13

Items where future costs and revenues are expected to differ for the alternative decisions under consideration.

Question 14

special order

Answer 14

A customer order that is outside of the normal pricing and terms.

Question 15

sunk cost

Answer 15

Historical amount expended on a project or object; not relevant to current decisions or future actions.

Question 16

time value of money

Answer 16

Conceptual notion holding that money to be received sooner is worth more than money to be received later.