Capital Budgeting: NPV, IRR, Payback, and Profitability Index

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9 Terms

1
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Net Present Value (NPV) and DCF

Difference between an investment's market value and its cost.

2
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Payback Period

Amount of time required for an investment to generate cash flows to recover its initial cost.

3
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Discounted Payback Period

Amount of time required for an investment's discounted cash flows to equal its initial cost.

4
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Accounting Average Return (AAR)

Investment's average net income divided by its average book value.

5
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Internal Rate of Return (IRR)

The discount rate that makes the NPV of an investment zero.

6
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Multiple Rates of Return

Possibility that more than one discount rate will make the NPV of an investment zero.

7
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Mutually exclusive Investment decisions

Taking one investment prevents the taking of another.

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Profitability Index (PI)

Present value of an investment's future cash flows divided by its initial cost

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Modified Internal Rate of Return (MIRR)

Used to determine how profitable an investment or Project is.