Chapter 9: Capital Budgeting Flashcards
Net Present Value (NPV)
the difference between an investments market value and costs
used to meausure how much value is created or added today by undertaking an investment.
discounted cash flow valuation (DCF)
the process of valuing an investment by discountin gits future cash flows.
payback period
the amount of time required for an investment to generate cash flows to recover its initial cost.
discounted payback period
the length of time required for inventes discounted cash flows to equal its initial cost.
average accounting return (AAR)
an investmetns average net income divided by its average bok value.
Internal Rate of Return
the discount rate that makes the NPV of an investment zero
Net present value profile
a graphical representation of the relationship between an invesments NPV’s and various discount rates.
Multiple rates of return
one potential problem in using the IRR method if more than one discount rate makes the NPV of an invement zero.
Mutually exvlusive investment decisions
one potention problem in using the IRR method is the acceptance of one project exlusdes that of another.
profitability index
the present value of an investment future cash flows divided by its initial cost; also benefit/cost ratio
benefit/cost ratio
the profitability index of an investment project
capital rationing
the situation that exists if a firm has positve NPV projects but cannot find the necessary financing
soft rationing
the situation tha toccurs when units in a business are allocated a certain amount of financing for capital budgeting.
hard rationing
the situation that occurs when a business cannot raise financing for a project under any circumstances