Chapter 9: Capital Budgeting Flashcards

1
Q

Net Present Value (NPV)

A

the difference between an investments market value and costs

used to meausure how much value is created or added today by undertaking an investment.

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2
Q

discounted cash flow valuation (DCF)

A

the process of valuing an investment by discountin gits future cash flows.

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3
Q

payback period

A

the amount of time required for an investment to generate cash flows to recover its initial cost.

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4
Q

discounted payback period

A

the length of time required for inventes discounted cash flows to equal its initial cost.

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5
Q

average accounting return (AAR)

A

an investmetns average net income divided by its average bok value.

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6
Q

Internal Rate of Return

A

the discount rate that makes the NPV of an investment zero

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7
Q

Net present value profile

A

a graphical representation of the relationship between an invesments NPV’s and various discount rates.

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8
Q

Multiple rates of return

A

one potential problem in using the IRR method if more than one discount rate makes the NPV of an invement zero.

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9
Q

Mutually exvlusive investment decisions

A

one potention problem in using the IRR method is the acceptance of one project exlusdes that of another.

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10
Q

profitability index

A

the present value of an investment future cash flows divided by its initial cost; also benefit/cost ratio

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11
Q

benefit/cost ratio

A

the profitability index of an investment project

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12
Q

capital rationing

A

the situation that exists if a firm has positve NPV projects but cannot find the necessary financing

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13
Q

soft rationing

A

the situation tha toccurs when units in a business are allocated a certain amount of financing for capital budgeting.

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14
Q

hard rationing

A

the situation that occurs when a business cannot raise financing for a project under any circumstances

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