Chapter 7 Flashcards
(12 cards)
Capital appreciation
A gain that occurs when an asset is worth more when sold than when purchased (ex: land, property, and stocks)
Capital investment decisions
Decisions involving large monetary investments expected to achieve long-term benefits for an organization
Cost of capital
The rate of return required to undertake a project; accounts for both the time value of money and risk
Goodwill
The value of intangible factors that are expected to affect an entity’s future earning power
Internal rate of return (IRR)
The rate of return on an investment that makes the net present value equal to $0 after all cash flows have been discounted at the same rate (% ROI)
Net present value (NPV)
The difference between the initial amount paid for an investment and the future cash inflows the investment brings in, adjusted for the cost of capital ($ ROI) (negative = bad)
Straight-line depreciation
Depreciates an asset an unequal amount each year until it reaches its salvage value at the end of its useful life
Sunk costs
Costs incurred in the past; should not be included in NPV-type analyses
Payback period
A method to evaluate the feasibility of an investment by determining how long it would take to cover the initial investment, disregarding the time value of money
Compound interest
A method in which interest is calculated on both the original principal and on all interest accumulated since the beginning of the investment time period
Simple interest
A method in which interest is calculated only on the original principal. The principal is the amount invested.
NPV Formula
PV = FV/(1+r)^n FV = PV(1+r)^n
