Finance Terms/Equations Flashcards
Capital Budgeting Decision
Process of determining which assets to invest in and how much to invest
Capital Expenditure Decision
determining which assets to invest in and how much to invest
Capital Investment Decision
determining which assets to invest in and how much to invest
Future Value
value of current asset at future date based on an assumed rate of growth
Present Value
amount of money needed to invest today in order to get some future dollar amount
Present Value of Annuity
amount received annually given a present value, interest rate, and number of periods (years).
Net Present Value (NPV)
Most common method for evaluating long-term investments by corporations. measures the value created for shareholders by the investment project.
NPV > 0, accept project
NPV < 0, reject project
Independent Project
Acceptance or rejection is independent of the acceptance or rejection of other projects
Mutually Exclusive Project
Can accept “A” or can accept “B”
or can reject both of them
but cannot accept both
Payback Period
number of periods (usually in years) needed for a firm to recover its initial investment.
Internal Rate of Return (IRR)
The discount rate that makes the Net Present Value (NPV) of project equal to zero
Crossover Rate
the cost of capital where two projects have the same net present value (NPV) or where their NPV profiles intersect.
Cost of Capital
minimum rate of return, or profit, a company must earn on investments to generate value for shareholders.
Nominal Return
amount of money generated by an investment before factoring in expenses such as taxes, investment fees, and inflation. If an investment generated a 10% return, the nominal rate would equal 10%.
Real Return
what is earned on an investment after accounting for taxes and inflation. Real returns are lower than nominal returns, which do not subtract taxes and inflation
