Capital Investments & Capital Allocation Flashcards
What are “Capital Investments”?
An expenditure for an asset or resources with a useful life of more than one year.
What is “Depreciation”?
The process of allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.
What is “Amortization”?
- The process of allocating the cost of an intangible long-term asset having a finite useful life.
- The allocation of the amount of a bond premium or discount to the periods remaining until bond maturity.
What is Maintenance CAPEX?
Investments in assets to keep them in operation or increase their efficiency without expanding their useful lives.
What is “Match Funding”?
Financing an asset with a source, such as a long or bond, that is aligned with certain attributes of the asset, such as the useful life.
What is “Capital Allocation”?
The process that companies use for decision-making on capital investments - those projects with a life longer than 1 year.
What is Net Present Value?
The present value of an investment’s cash inflows (benefits) minus the present value of its cash outflows (costs).
What is the “internal rate of return”? or IRR?
- The discount rate that makes the NPV equal to ‘0’.
- The discount rate that makes the present value of an investments costs equal to the present value of its benefits.
What is “Return on Invested Capital” or ROIC?
A measure of profitability of a company relative to the amount of capital invested by equity holders and debt holders.
How do you calculate ROIC?
NOPAT / Average Invested Capital
What is a “Hurdle Rate”?
The minimum rate of return on an investment that a fund must reach before a GP receives carried interest.
What are “Sunk Costs”?
A cost that has already been incurred.
What are “Pet Projects”?
A capital investment that is pursued by management but is not economically justifiable by a disinterested party.
Motivations may include self-dealing and vanity.
What is a “Real Option”?
A right - but not an obligation - for management to make a decision with respect to a capital allocation that alters future cash flows from the original forecasted scenario.
What does “Exercise” mean?
The decision to transact the underlying by an option holder.
