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Capital Budgeting Cash Flows
Managerial Finance Ch 8
15
Business
04/30/2010

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Term
capital budgeting
Definition
the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth
Term
capital expenditure
Definition
an outlay of funds by the firm that is expected to produce benefits over a period of time greater than 1 year
Term
operating expenditure
Definition
an outlay of funds by the firm resulting in benefits received within 1 year
Term
capital budgeting process
Definition
five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up
Term
independent projects
Definition
projects whose cash flows are unrelated or independent of one another; the acceptance of one does not elimante the others from further consideration
Term
mutually exclusive projects
Definition
projects that compete with one another, so that the acceptance of one eliminates from further consideration all other projects that serve a similar function
Term
unlimited funds
Definition
the financial situation in which a firm is able to accept all independent projects that provide an acceptable return
Term
capital rationing
Definition
The financial situation in which a firm has only a fixed number of dollars available for capital expenditures, and numerous projects compete for these dollars.
Term
accept-reject approach
Definition
The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criterion
Term
ranking approach
Definition
The ranking of capital expenditure projects on the basis of some predetermined measure, such as the rate of return
Term
conventional cash flow pattern
Definition
An initial outflow followed only by a series of inflows
Term
nonconventional cash flow pattern
Definition
An initial outflow followed by a series of inflows and outflows
Term
relevant cash flows
Definition

the incremental cash outflow (investment) and resulting subsequent inflows associated with a proposed capital expenditure

 

Term
incremental cash flows
Definition
the additional cash flows-outflows or inflows-expected to result from a proposed capital expenditure
Term
initial investment
Definition
the relevant cash outflow for a proposed project at time zero