Investment Decision Rules

Flashcards covering key concepts related to investment decision-making rules, including definitions of NPV, IRR, and related financial terms.

Net Present Value (NPV)

The difference between the present value of a project's benefits and the present value of its costs.

Internal Rate of Return (IRR)

The interest rate that sets the net present value of the cash flows equal to zero.

Modified Internal Rate of Return (MIRR)

A financial measure that calculates the profitability of an investment, taking into account the cost of capital.

Discount Rate (r)

The rate used to determine the present value of future cash flows.

Present Value (PV)

The value of a cash flow today, which represents the amount needed to invest today to yield future cash flows.

Investment Decision Rule

A guideline used to evaluate which projects to accept or reject based on specific criteria such as NPV.

Payback Rule

An alternative decision rule that considers how long it takes to recover the initial investment.

Cash Flow

The total amount of money being transferred into and out of a business, especially as affecting liquidity.

Valuation Principle

The principle that states that the value of a project can be determined by the present value of its expected future cash flows.

NPV Decision Rule

A rule that states to undertake projects with a positive NPV as they increase the value of the firm.