Finance - Investment Criteria & NPV Calculation

Flashcards covering key vocabulary and concepts related to investment criteria and NPV calculations in finance.

Net Present Value (NPV)

The difference between the present value of cash inflows and outflows over a period of time.

Average Accounting Return (AAR)

A measure used to evaluate the profitability of an investment based on its accounting return.

Payback Period (PP)

The time it takes for an investment to generate an amount of income equal to the cost of the investment.

Profitability Index (PI)

A ratio that measures the relative profitability of an investment, calculated as the present value of future cash flows divided by the initial investment.

Internal Rate of Return (IRR)

The discount rate that makes the net present value of an investment zero.

Working Capital (NWC)

The difference between current assets and current liabilities that a company needs to operate its day-to-day activities.

Sunk Costs

Costs that have already been incurred and cannot be recovered; should not be considered in investment decisions.

Opportunity Costs

The potential benefit lost when one alternative is chosen over another.

Capital Cost Allowance (CCA)

A tax deduction in Canada that allows a taxpayer to claim depreciation on an asset.

Tax Shield

The reduction in income taxes that results from taking an allowable deduction from taxable income.