annual rate of return method
the determination of the profitability of a capital expenditure, computed by dividing expected annual net income by the average investment.
the process of making capital expenditure decisions in business
cash payback technique
a capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment.
cost of capital
the average rate of return that the firm must pay to obtain funds from creditors and stockholders
discounted cash flow technique
a capital budgeting technique that considers both the estimated net cash flows from the investment and the time value of money
the interest rate used in discounting the future net cash flows to determine present value.
internal rate of return (IRR)
the interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows
internal rate of return (IRR) method
a method used in capital budgeting that results in finding the interest yield of the potential investment
net present value (NPV)
the difference that results when the original capital outlay is subtracted from the discounted net cash flows
Net present value (NPV) method
a method used in capital budgeting in which net cash flows are discounted to their present value and then compared to the capital outlay required by the investment.
a thorough evaluation of how well a project’s actual performance matches the original projections.
a method of comparing alternative projects that takes into account both the size of the investment and its discounted future net cash floes. it is computed by dividing the present value of net future cash flows by the initial investment.
required rate of return
the rate of return management expects on investments also called the discount rate or cost of capital
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