Chapter 11: Investment Decision Criteria

These flashcards cover key concepts related to investment decision criteria and capital budgeting as discussed in Chapter 11 of the finance lecture notes.

Capital Budgeting

The process of determining what productive assets to purchase.

Net Present Value (NPV)

The difference between the present value of cash inflows and cash outflows; used to evaluate investment profitability.

Internal Rate of Return (IRR)

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

Payback Period

The length of time it will take to recover a project's initial cost.

Profitability Index (PI)

A cost-benefit ratio equal to the present value of an investment's future cash flows divided by its initial cost.

Capital Rationing

A situation where a firm has limited funds and must choose the best projects to undertake.

Weighted Average Cost of Capital (WACC)

The required rate of return for an investment that reflects the average cost of equity and debt.

Cash Flows

The net amount of cash being transferred into and out of a business.

Discounted Payback Period

The payback period that accounts for the time value of money by discounting future cash flows.

Risk-Return Tradeoff

The principle that potential return rises with an increase in risk.

Renewal Investment

Capital expenditures made to repair or overhaul existing equipment.

Cost of Capital

The return rate that a company must earn on its investment projects to maintain its market value.

Cash Flow from Operations

Cash generated from a firm's regular business operations.