Chapter 30: Capital Investments and Capital Allocation Flashcards
Capital investments
An expenditure for an asset or resource with a useful life of more than one year.
Maintenance capital expenditures
Investments in assets to keep them in operation or increase their efficiency without extending their useful lives.
Match funding
Financing an asset with a source, such as a loan or bond, that is aligned with certain attributes of the asset, such as duration and the respective streams of income and financing costs.
Capital allocation
The process that companies use for decision making on capital investments—those projects with a life of one year or longer.
Return on invested capital (ROIC)
A measure of the profitability of a company relative to the amount of capital invested by the equity holders and debtholders.
Hurdle rate
Also called “preferred return.” The minimum rate of return on investment that a fund must reach before a GP receives carried interest.
Real option
A right, but not an obligation, for management to make a decision with respect to a capital investment that alters future cash flows from the original forecasted scenario.
Abandonment option
The option to terminate an investment at some future time if the financial results are disappointing.
Growth option
The option to make additional investments in a project at some future time if the financial results are strong. Also called an expansion option.
Price-setting option
The option to adjust prices when demand or supply varies from what is forecast.
Production flexibility option
The option to alter production when demand varies from what is forecast.
