Capital Budgeting and Foreign Exchange Concepts

A collection of key terms and definitions related to capital budgeting and foreign exchange concepts for exam preparation.

Payback Period

Time it takes for cash inflows to recover the initial investment.

NPV (Net Present Value)

Present value of cash inflows minus initial cost.

IRR (Internal Rate of Return)

Discount rate that makes NPV = 0.

NPV Profile

Graph of discount rate vs NPV.

Mutually Exclusive Projects

Choosing one project prevents choosing another.

Straight-Line Depreciation

Depreciation method calculated as (Cost – Salvage)/Life.

Operating Cash Flow (OCF)

Calculated using OCF = EBIT(1-T) + Dep.

After-Tax Salvage Value (ATSV)

ATSV = SV - (SV - BV)T, used in depreciation calculations.

Book Value (BV)

Cost minus accumulated depreciation.

Terminal Cash Flow

Sum of ATSV and recovery of working capital.

MIRR (Modified IRR)

Modified Internal Rate of Return formula: MIRR = (TV/PV)^(1/n) - 1.

Foreign Exchange Market

Market where currencies are traded.

Interest Rate Parity (IRP)

Difference in interest rates equates to forward % premium/discount.

Political Risk

Risk of loss due to political actions of a government.

Exchange Rate Risk

Risk that operating internationally exposes the firm to currency value fluctuations.

U.S. Dollar Equivalent

Value in dollars of one unit of foreign currency.

Purchasing Power Parity (PPP)

Currencies with higher inflation tend to depreciate.

Currency Appreciation

A stronger currency buys more foreign currency.

Currency Depreciation

A weaker currency buys less foreign currency.

Direct Quote

Dollars per unit of foreign currency.

Indirect Quote

Foreign currency per U.S. dollar.

Currency Conversion

Process of calculating equivalent values in different currencies.

Cross Rates

Exchange rate between two currencies quoted against USD.

Forward Rate

Future contract price for currency exchange.

Spot Rate

Current exchange rate.

EPS (Earnings Per Share)

Calculated as EPS = (EBIT - Interest)/Shares Outstanding.

ROE (Return on Equity)

Calculated as ROE = Net Income/Equity.

Leverage

Using debt to buy back shares, which can increase EPS if operating income exceeds interest expense.