Chapter13: Capital Budgeting Decisions
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Capital budgeting
The process of planning significant investments in projects that have longterm implications such as the purchase of new equipment or the introduction of a new product. (p. 580)

Cost of capital
The average rate of return a company must pay to its longterm creditors and shareholders for the use of their funds. (p. 585)

Internal rate of return
The discount rate at which the net present value of an investment project is zero; the rate of return of a project over its useful life. (p. 587)

Net present value
The difference between the present value of an investment project's cash inflows and the present value of its cash outflows. (p. 581)

Outofpocket costs
Actual cash outlays for salaries, advertising, repairs, and similar costs. (p. 586)

Payback period
The length of time that it takes for a project to fully recover its initial cost out of the net cash inflows that it generates. (p. 597)

Postaudit
The followup after a project has been approved and implemented to determine whether expected results were actually realized. (p. 602)

Preference decision
A decision in which the alternatives must be ranked. (p. 580)

Project profitability index
The ratio of the net present value of a project's cash flows to the investment required. (p. 596)

Screening decision
A decision as to whether a proposed investment project is acceptable. (p. 580)

Simple rate of return
The rate of return computed by dividing a project's annual incremental accounting net operating income by the initial investment required. (p. 601)

Working capital
Current assets less current liabilities. (p. 583