Chapter 12 (Managerial Accountancy)

Capital Budgeting

The process of planning significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of a new product. (p. 564)

Cost of capital

The average rate of return a company must pay to its long-term creditors and shareholders for the use of their funds. (p. 572)

Internal rate of return

The discount rate at which the net present value of an investment project is zero; the rate of return of a project over its useful life. (p. 575)

Net present value

The difference between the present value of an investment project’s cash inflows and the present value of its cash outflows. (p. 569)

Out-of-pocket costs

 Actual cash outlays for salaries, advertising, repairs, and similar costs. (p. 574)

 Payback period

The length of time that it takes for a project to fully recover its initial cost out of the net cash inflows that it generates. (p. 566)

Postaudit

The follow-up after a project has been approved and implemented to determine whether expected results were actually realized. (p. 585)

Preference decision

A decision in which the acceptable alternatives must be ranked. (p. 564)

Project profitability index

The ratio of the net present value of a project’s cash flows to the investment required. (p. 582)

Screening decision

A decision as to whether a proposed investment project is acceptable. (p. 564)

Simple rate of return

The rate of return computed by dividing a project’s annual incremental net operating income by the initial investment required. (p. 583)

Time value of money

The concept that a dollar today is worth more than a dollar a year from now.(p. 565)

Working capital

 Current assets less current liabilities. (p. 565)

Annuity

A series of identical cash flows. (p. 608)

Compound interest

The process of paying interest on interest in an investment. (p. 606)

Discount Rate

The rate of return that is used to find the present value of a future cash flow

Discounting

The process of finding the present value of a future cash flow

Present Value

The value now of an amount that will be received in some future period