Chapter 9 Flashcards
the process of planning and evaluating expenditures on assets whose cash flows are expected to extend beyond one year.
Capital budgeting
decisions whether to purchase capital assets to take the place of existing assets to maintain or improve existing operations.
Replacement decision
decisions whether to purchase capital projects and add them to existing assets to increase existing operations.
Expansion decision
projects whose cash flows are not affected by decisions made about other projects.
Independent projects
a set of projects in which the acceptance of one project means the others can not be accepted.
Mutually exclusive projects
a comparison of the actual and expected results for a given capital project.
Post-audit
the present value of an assets future cash flow minus it purchase price.
Net present value
the discount rate that forces the PV of a project’s expected cash flows to equal its initial cost.
Internal rate of return
the discount rate that the IRR must exceed for a project to be considered acceptable.
Required rate of return
a graph that shows the NPV’s for a project at various discount rates
Net present value profitable
the assumption that cash flows from a project can be reinvested (1 )at the cost of capital if using the NPV method and (2) at the internal rate of return, if using the IRR method.
Reinvestment rate assumption
the situation in which a project has two or more IRR’s
Multiple IRR’s
the discount rate at which present value of the projects cost is equal to the present value of the projects cost is equal to the present value in terminal value, where the terminal value is found at the sum of the future values of the cash inflows compounded at the firms required rate of return and the present value of the cash outflows is found using the same required rate of return.
Modified IRR
the length of time it takes to recover the original cost of an investment from its expected cash flows.
Traditional payback period
the length of time it takes for projects discounted cash flows to repay the cost of the investment.
Discounted payback period
