Capital Budgeting Review Flashcards

Flashcards reviewing key vocabulary and concepts from the lecture on capital budgeting, including NPV, IRR, payback rule, and profitability index.

Capital Budgeting

The process of making decisions about projects; also known as project evaluation.

Net Present Value (NPV)

A method used in capital budgeting to analyze the profitability of a projected investment or project.

Internal Rate of Return (IRR)

The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Payback Rule

A capital budgeting method that determines how long it takes for a project to recover its initial investment.

Profitability Index

A ratio of payoff to investment of a proposed project. Useful for ranking projects in terms of value created per unit of investment.

Initial Expenditure/Initial Cost

The upfront capital outlay required to start a project.

Cash Inflows

The positive cash flows generated by a project over its lifespan.

Perpetuity

A stream of cash flows that continues forever.

Discount Rate

The rate used to discount future cash flows back to their present value; typically the cost of capital.

Independent Project

A project whose acceptance or rejection does not directly affect the acceptance or rejection of other projects.

Mutually Exclusive Projects

A set of projects where the acceptance of one project means the others cannot be accepted.

Delayed Investment

A project where the initial cash flow is positive, followed by negative cash flows.

Non-Conventional Cash Flow

A cash flow pattern where the signs of the cash flows change more than once over the project's life.

Conventional Investment

Initial cost and then the income.

Time Value of Money

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Cost of Capital

The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile.