Capital Budgeting with Investment Risk & Returns Flashcards
It is the long-term commitment of significant funds to meet certain objectives
Capital Investment
It is the process of measuring, evaluating, and selecting capital investments
Capital Budgeting
6 Formal Stages of Capital Budgeting
- Identification and Definition
- Search
- Information
- Selection
- Financing
- Implementation and Control
It is used as a discount rate in discounted capital budgeting techniques like NPV and IRR
Cost of Capital
It measures the length of time required to recover the amount of initial investments
Payback Period
Payback Period Formula
Net Investments / Net Cash Inflows
It is used to measure the capital project’s profitability from accounting standpoint by relating the required investment to the future annual net income
Accounting Rate of Return
Accounting Rate of Return Formula
Ave. Annual NI / Orig. or Ave. Investments
It represents portion of a security’s risk that can be controlled through proper diversification. It is unique to a given risk
Diversifiable Risk
It results from forces outside the firm’s control and is therefore not unique to a given security
Non-diversifiable Risk
