Ch 26

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Anonymous
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54321
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Ch 26
Updated:
2010-12-08 11:38:34
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Capital Investment Analysis
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Capital Investment Analysis
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  1. annuity
    A series of equal cash flows at fixed intervals.
  2. average rate of return
    A method of evaluating capital investment proposals that focuses on the expected profitability of the investment.
  3. capital investment analysis
    The process by which management plans, evaluates, and controls long-term capital investments involving property, plant, and equipment.
  4. capital rationing
    The process by which management plans, evaluates, and controls long-term capital investments involving fixed assets.
  5. cash payback period
    The expected period of time that will elapse between the date of a capital expenditure and the complete recovery in cash (or equivalent) of the amount invested.
  6. currency exchange rate
    The rate at which currency in another country can be exchanged for local currency.
  7. inflation
    A period when prices in general are rising and the purchasing power of money is declining.
  8. internal rate of return (IRR) method
    A method of analysis of proposed capital investments that uses present value concepts to compute the rate of return from the net cash flows expected from the investment.
  9. net present value method
    A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.
  10. present value concept
    Cash to be received (or paid) in the future is not the equivalent of the same amount of money received at an earlier date.
  11. present value index
    An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.
  12. present value of an annuity
    The sum of the present values of a series of equal cash flows to be received at fixed intervals.
  13. time value of money concept
    The concept that an amount of money invested today will earn income.
  14. Average Rate of Return Method
    Avg Rate of Return = Est. Avg Annual Income / Avg Investment

    Avg Investment = (Initial Cost + Residual value) / 2
  15. Cash Payback Period
    Initial Cost / Annual Net Cash Inflow
  16. Net Present Value Method
    Present Value Index = (Total Present Value of Net Cash Flow) / (Amount to be invested)
  17. Internal Rate of Return Method
    Present Value Factor for an annuity of $1 = (Amount to be invested) / (Equal annual net cash flows)

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