Managerial Accounting & Control - Capital Investment Decisions

This set of vocabulary flashcards covers key concepts and methods of capital budgeting as presented in Chapter 12 of the Managerial Accounting & Control course.

Capital budgeting

The process of making long-term investment decisions.

Capital investment

The acquisition of a capital asset, such as equipment, plants, vehicles, or information technology.

Payback period

A capital budgeting method that measures how quickly an investment recovers its initial costs, where a shorter period is considered more attractive.

Accounting rate of return (ARR)

A capital budgeting method that indicates the profitability of an investment by focusing on operating income rather than net cash inflow.

Net present value (NPV)

A capital budgeting method that factors in the time value of money to evaluate investment desirability.

Profitability Index (PI)

A capital budgeting method that computes the number of dollars returned for every dollar invested, calculated as $\text{Present value of net cash inflows} \div \text{Initial investment}$.

Internal rate of return (IRR)

The return that a company expects to earn from an investment, factoring in the time value of money.

Capital rationing

Step 4 of the capital budgeting process, involving the selection among alternative investments if necessary.

Post-audits

Step 5 of the capital budgeting process, performed after capital investments have been made.

Time value of money

The principle that a dollar received today is worth more than a dollar received in the future.

Principal amount (p)

The amount of the investment or borrowing, which can be a single lump sum or an annuity.

Number of periods (n)

The length of time from the beginning of an investment until its termination.

Simple interest

Interest calculated solely on the principal amount.

Compound interest

Interest that assumes all interest earned will remain invested at the same interest rate.

Future value (Lump sum)

The value of a single investment at a future date, calculated as $\text{Principal amount} \times \text{FV factor}$.

Future value (Annuity)

The future value of a series of equal cash installments, calculated as $\text{Amount of each cash installment} \times \text{Annuity FV Factor}$.