SU 10: Investment Decisions Flashcards Preview

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Flashcards in SU 10: Investment Decisions Deck (15)
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0
Q

Accounting Rate of Return

A

Average Net income/Average investment on the project

1
Q

Stages in Capital Budgeting

A

1) Identification and definition
2) Search
3) Information-acquisition
4) Selection
5) Financing
6) Implementation and monitoring

2
Q

Book Rate of Return

A

GAAP net income from investment/Book value of investment

3
Q

Net Initial Investment

A

Purchase of new equipment, initial working capital requirements, after-tax proceeds from disposal of old equipment

4
Q

Annual Net Cash Flows

A

After-tax cash collections from operations, tax savings from depreciation deductions

5
Q

Project Termination Cash Flows

A

After-tax proceeds from disposal of new equipment, recovery of working capital

6
Q

Net Present Value

A

The expected cash streams related to a project, then discounted them at the hurdle rate

7
Q

Internal Rate of Return

A

Discount rate at which the investment’s NPV equals zero

8
Q

Breakeven Time

A

The period required for the discounted cumulative cash inflows on a project to equal the discounted cumulative cash outflows

9
Q

Payback Period

A

Initial net investment/Annual expected cash flow

10
Q

Payback Reciprocal

A

(1/Payback) sometimes used as an estimate of the internal rate of return

11
Q

Bailout Payback Method

A

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

12
Q

Profitability Index

A

NPV of future cash flows/Net investment

13
Q

Real rate approach

A

Revenue x 1+Growth rate

14
Q

Nominal rate approach

A

Revenue x (1+ Growth rate) x (1 + Inflation rate)