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Capital investment decision
Decisions involving high-dollar investments expected to achieve long-term benefits for an organization
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Strategic Decision
Capital investment decision designed to increase a health care organization's strategic (long-term) position
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Expansion decision
Capital investment decision designed to increase the operational capability of a health care organization
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Replacement decision
Capital investment decisions designed to replace older assets with newer, cost-saving ones
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Retrained Earnings
The portion of profits that an organization keeps for itself in-house to use in growth and support of its mission
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Capital Appreciation
Occurs whenever an asset is worth more when sold than when purchased. Common examples would be land, property, or stocks
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Payback method
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
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Net Present Value (NPV)
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
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Discounted cash flows
Cash flows that have been adjusted to account for the cost of capital
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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
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Salvage Value
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
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Goodwill
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
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Internal Rate of Return (IRR)
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
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Required rate of return
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
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Straight-line Depreciation
A method that depreciates an asset an equal amount each year until it reaches its salvage value at the end of its useful life
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Capital investments
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
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Dividends
Represent the portion of profit that an organization distributes to equity investors
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Interest
Is a payment to creditors, those who have loaned the organization funds or otherwise extended credit
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Internal Rate of Return method
Depends on whether the cash flows are equal or unequal
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Incremental differences
Brought about by replacing an asset.
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NPV Method
Accounts for cash flows after payback and discounting these cash flows by the project's cost of capital
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Cannibalization
Occurs when a new service decreases the revenues from other established services or product lines; these are considered cash outflows
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Incremental cash flows
Cash flows that occur solely as a result of a particular action such as undertaking a project
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Nonregular cash flows
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
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Opportunity cost
Proceeds lose by forgoing other opportunities
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Operating cash flows
Cash flows that occur on a regular basis, oftentimes following implementation of a project
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Sunk costs
Costs incurred in the past. They should not be included in NPV-type analyses
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