SU 10: Investment Decisions Flashcards
Accounting Rate of Return
Average Net income/Average investment on the project
Stages in Capital Budgeting
1) Identification and definition
2) Search
3) Information-acquisition
4) Selection
5) Financing
6) Implementation and monitoring
Book Rate of Return
GAAP net income from investment/Book value of investment
Net Initial Investment
Purchase of new equipment, initial working capital requirements, after-tax proceeds from disposal of old equipment
Annual Net Cash Flows
After-tax cash collections from operations, tax savings from depreciation deductions
Project Termination Cash Flows
After-tax proceeds from disposal of new equipment, recovery of working capital
Net Present Value
The expected cash streams related to a project, then discounted them at the hurdle rate
Internal Rate of Return
Discount rate at which the investment’s NPV equals zero
Breakeven Time
The period required for the discounted cumulative cash inflows on a project to equal the discounted cumulative cash outflows
Payback Period
Initial net investment/Annual expected cash flow
Payback Reciprocal
(1/Payback) sometimes used as an estimate of the internal rate of return
Bailout Payback Method
The length of time required for the sum of the cumulative net cash inflow from an investment and its salvage value to equal the original investment
Profitability Index
NPV of future cash flows/Net investment
Real rate approach
Revenue x 1+Growth rate
Nominal rate approach
Revenue x (1+ Growth rate) x (1 + Inflation rate)
