Key Terms X Flashcards
Capital budgeting
The process of planning significant outlays on projects that have long-term implications, such as the purchase of new equipment or the introduction of a new product
Cost of capital
The overall cost to an organisation of obtaining investment funds, including the cost of both debt sources and equity sources
Internal rate of return
The discount rate at which the new present value of an investment project is zero; thus, the internal rate of return represents the interest yield promised by a project over its useful life
Net present value
The difference between the present value of the cash inflows and the present value of the cash outflows associated with an investment project
Out-of-pocket costs
Actual cash outlays for salaries, advertising, repairs and similar costs
Payback period
The length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates
Postaudit
The follow-up after a project has been approved and implemented to determine whether expected results are actually realised
Preference decisions
A decision as to which of several competing acceptable investment proposals is best
Profitability index
The ratio of the present value of a project’s cash inflows to the investment required
Required rate of return
The minimum rate of return that an investment project must yield to be acceptable
Screening decisions
A decision as to whether a proposed investment meets some preset standard of acceptance
Simple/Accounting rate of return
The rate of return computed by dividing a project’s annual accounting profit by the initial investment required
Time-adjusted rate of return
This term is synonymous with internal rate of return
Working capital
The excess of current assets over current liabilities
Yield
A term synonymous with internal rate of return and time-adjusted rate of return
