Chapter 25 Flashcards
Rate used to evaluate the acceptability of an investment; equals the after-tax periodic income from a project divided by the average investment in the asset; also called rate of return on average investment.
Accounting rate of return (ARR)
Expense (or cost) that is relevant for decision making; expense that is not incurred if a department, product, or service is eliminated.
Avoidable expense
Process of analyzing alternative investments and deciding which assets to acquire or sell.
Capital budgeting
Restating future cash flows in terms of their present value.
Discounting
Minimum acceptable rate of return (set by management) for an investment.
Hurdle rate
Additional cost incurred only if a company pursues a specific course of action.
Incremental cost
Rate used to evaluate the acceptability of an investment; equals the rate that yields a net present value of zero for an investment.
Internal rate of return (IRR)
Cash inflows minus cash outflows
Net cash flow
Dollar estimate of an asset’s value that is used to evaluate the acceptability of an investment; computed by discounting future cash flows from the investment at the hurdle rate and then subtracting the initial cost of the investment.
Net present value (NPV)
The potential benefit lost by taking a specific action when two or more alternative choices are available.
Opportunity Cost
Time-based measurement used to evaluate the acceptability of an investment; equals the time expected to pass before an investment’s net cash flows equal its initial cost.
Payback period (PBP)
Expense (or cost) that is not relevant for business decisions; an expense that would continue even if a department, product, or service is eliminated.
Unavoidable expense
