chapter 7 accounting terms

what is cpaital budgeting

planning large long term investments

what are the two types of decisions

screening- accept or reject one project and preference- choose between multiple projects

what does the payback method measure

time needed to recover the initial investment

payback formula

ii/acif

how do you handle uneven cash flows

add cash inflows year by year until its recovered

decision rule for payback?

shorter payback period= better

key limitations of payback method

ignores tvm and cf after pb

what is NPV

difference between present value of inflows and ii

NPV formula

PV of inflows- ii

what does NPV consider that payback doesn’t

tvm

what is the discount rate

required rate or return

NPV decision rule? (2)

accept if npv is more than 0 and higher npv= better

what is an annuity in NPV

equal cf received each year

IRR represents what

the projects actual return percentage

IRR decision rule

accept if IRR is more than the required rate

how to estimate IRR

capital investment/ annual ci

IRR limitations (2)

difficult with uneven cash flows and assumes reinvestment at IRR

what does the simple rate of return use

NOI not cash

simple rate formula

NOI/ ii

how to find noi

cost savings- dep

simple rate decision rule?

higher rate= better

2 limitations of simple rate

ignores tvm and can give misleading results

what are cash flows

cash inflows- cash outflows

what is working capital in projects

outflow at start and inflow at end