Chapter 10: Capital Investment and Financial Risk - Vocabulary Flashcards
(15 cards)
Present value
The value today of money that will be received in the future
Discounting
The process of calculating the present value of a future amount
Discount rate
The rate of return used in determining the present value of a future sum
Annuity
A series of fixed payments made on specified dates over a set period
Net present value (NPV)
The present value of all future net cash flows (including salvage value) discounted at the cost of capital, minus the cost of the initial investment, also discounted at the cost of capital
Capital budgeting
The process of evaluating alternative capital investment proposals in terms of the cash outlays that the proposals require and the present values of the cash inflows that the proposals are likely to generate
Operating expenditures
Disbursements for assets that will be consumed in a relatively short period, usually within one year or a single accounting period
Capital expenditures
Disbursements for assets that will be consumed over a relatively long period, usually over multiple accounting periods
Salvage value
The residual value of the original investment at the end of its useful life
Risk-return trade-off
The tendency for the potential return to increase as risk increases
Differential (incremental) annual after-tax net cash flow
The change in an organization’s aggregate annual net cash flows resulting from implementing a proposal
Depreciation expense
An accounting method that spreads out the expense of a purchase over the life expectancy of the item
Straight-line depreciation method
An accounting method of calculating depreciation by taking an equal amount of an asset’s cost as an expense for each year of the asset’s expected useful life
Sensitivity analysis
A method to investigate the effect of a change in one or more variables on the results of a financial analysis
Forward contract
A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price
