ch7

Decisions involving high-dollar investments expected to achieve long-term benefits for an organization

Capital investment decision designed to increase a health care organization's strategic (long-term) position

Capital investment decision designed to increase the operational capability of a health care organization

Capital investment decisions designed to replace older assets with newer, cost-saving ones

The portion of profits that an organization keeps for itself in-house to use in growth and support of its mission

Occurs whenever an asset is worth more when sold than when purchased. Common examples would be land, property, or stocks

To evaluate the feasibility of an investment by determining how long it would take until the initial investment is recovered, disregarding the time value of money

Difference between the initial amount paid for an investment and the future cash inflows that the investment brings in, adjusted for the cost of capital

Cash flows that have been adjusted to account for the cost of capital

The rate of return required to undertake a project; the cost of capital accounts for both the time value of money and risk; also called the hurdle rate or discount rate

The amount of cash to be received when an asset (equipment) is sold, usually at the end of its useful life; also called terminal value, residual value, and scrap value

An amount paid above and beyond the book value of an asset (typically a business) when it is sold, representing the value of intangible factors such as brand reputation, customer or supplier relationships, employee competencies, and the like

That rate of return on an investment that makes the net present value equal to $0, after all cash flows have been discounted at the same rate. ALSO: the discount rate at which the discounted cash flows over the life of the project exactly equal the initial investment

An organization's minimally acceptable internal rate of return on any investment to justify an initial investment. Also called cost of capital or hurdle rate

A method that depreciates an asset an equal amount each year until it reaches its salvage value at the end of its useful life

Expected to achieve long-term benefits for the organization that generally fall into three categories: nonfinancial benefits, financial returns, and the ability to attract more funds in the future

Represent the portion of profit that an organization distributes to equity investors

Is a payment to creditors, those who have loaned the organization funds or otherwise extended credit

Depends on whether the cash flows are equal or unequal

Brought about by replacing an asset.

Accounts for cash flows after payback and discounting these cash flows by the project's cost of capital

Occurs when a new service decreases the revenues from other established services or product lines; these are considered cash outflows

Cash flows that occur solely as a result of a particular action such as undertaking a project

Cash flows that occur sporadically or on an irregular basis. A common nonregular cash flow is salvage value, receipt of funds following a one-time sale of an asset at the end of its useful life

Proceeds lose by forgoing other opportunities

Cash flows that occur on a regular basis, oftentimes following implementation of a project

Costs incurred in the past. They should not be included in NPV-type analyses