Decision Making Techniques Flashcards
What is a relevant cost?
A cost that arises directly from a decision; these are often future incremental cash flows.
What is contribution?
The difference between sales and variable unit costs; this can be calculated per period or per unit.
What is linear programming?
A technique that can be used to maximise contribution when there are two products and multiple constraints.
What is net present value?
The net result of cash inflows and outflows at different points in time, converted into present value terms by using discount factors.
What is net present cost?
The net result of cash inflows and outflows at different points in time, converted into present cost terms by using discount factors; net present cost is always a net outflow.
What is the cost of capital?
The interest rate that represents the cost to the organisation of using its own funds or obtaining further funds.
What is internal rate of return (IRR)?
The discount rate that when applied to the cash flows in a project results in a net present value of zero.
What is interpolation?
A technique that can be used to estimate the internal rate of return.
What is the payback period?
The time it takes for the cash inflows from a project to equal the original investment.
What is the discounted payback period?
The time it takes for the discounted cash inflows from a project to equal the original investment.
What is accounting rate of return (ARR)?
The average profit from a project, expressed as a percentage of the investment.
