Phase 3 Flashcards
Inflation (also Deflation and Stagflation)
a condition in the economy characterized by rising prices for goods and services. An inflationary trend makes future dollars have less purchasing power than current dollars. Main culprits - political instability and excessive deficit spending at the federal level
Inflation rate
Rate that money loses value over time. Used interchangeably with interest rate unless otherwise specified.
Initial cost
Present initial investment to purchase a good. What you have to pay at the time of procurement of an investment
Interest rate
The proportion of a loan that is charged to the borrower, typically expressed as a periodic percentage of the remaining loan (used interchangeably with the discount rate and MARR in this class, even though in reality discount rate > interest rate)
Internal rate of return (IRR)
Rate of return that makes the NPV = 0. If the cost of of the capital is greater than the IRR, then the investment should not be taken. However, this generally applies if the negative cash flows preceded the positive cash flows. The IRR rule might disagree with the NPV rule if expenditures occur after the revenue. Multiple IRR’s can also exist and give conflicting answers, hence NPV is more accurate
Law
Federal- or state-enacted laws or statutes, the rules of federal and state regulatory bodies promulgated to give practical effect to enacted statutes, and the common law
Minimum Attractive Rate of Return (MARR)
the lowest interest rate you are willing to accept when you make an investment (the hurdle rate)
Mutually exclusive (-alternatives)
(in statistics) of any two possible outcomes A and B, the logical expression A and B cannot occur.
OH: two projects that cannot co-occur; you must choose one or the other.
Net present value (NPV) or present worth (PW)
The total sum of all cash flows, both positive and negative, expressed in terms of the value to the investor at the present time. Accounts for the time value of money via the interest rate parameter. Present worth (PW) is the estimated current value of a future amount to be received or paid out, discounted at an appropriate rate. Equivalent to NPV
Nominal interest rate
annual interest rate without considering the effects of compounding
Offer (part of a contract)
An expression of willingness to contract on certain terms with the expectation that, upon acceptance, it will be legally binding
Operating costs
Annualized/recurring expenditure for the operation or maintenance of an investment.
Owner
Entity that initiates a project, finances it, contracts it out, and benefits from its outputs. The party that determines when a particular project is needed
Ownership life
The length of time that the owner has possession of an investment
Present value (PV), Net Present Value (NPV)
See NPV/PW above (for the sake of this class, present value and present worth have the same definition)
