Chapter 8: Capital Budgeting Flashcards
process of allocating financial resources to new long-term investment projects
Capital Budgeting
measures the length of time it takes to recover a project’s initial investment
Payback Period Method
refers to the number of years in which the investment may be recovered at its discounted cash inflows
Discounted Payback Period
sometimes called the average rate of return
Accounting Rate of Return
it is obtained by getting the present value of all the cash inflows using the cost of capital less the initial investment
Net Present Value Method
rate of return that equates the present value of all the cash inflows to the initial investment
Internal Rate of Return
mathematical process where a fair estimation of the internal rate of return can be determined by means of trial and error
Interpolation
ratio of the total PV of future cash inflows to the initial investment
Profitability Index
if the projects compete with other projects in such a way that the acceptance of one precludes the acceptance of the others
Mutually Exclusive
deals with the combination of acceptable projects that will provide the highest overall NPV
Capital Rationing
process by which the management will decide on whether to replace an existing fixed-asset with a new one
Replacement Decision
Approaches on Capital Budgeting
- Replacement Chain (Common Life) Approach
- Annualized Net Present Value (ANPV) Approach
process in which projects with unequal lives are compared using their respective NPV’s
Replacement Chain (Common Life) Approach
used when comparing mutually exclusive projects to have an unequal duration
Annualized Net Present Value (ANPV) Approach
