Term

Definition
the set of tools companies use to evaluate the value of large scale expenditures 


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Drawbacks of using allocation for decision making 

Definition
1 doesn't account for time value of money 2 doesn't account for the lumpy nature of capacity resources 


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Definition
arises because a dollar today is worth more than a dollar tomorrow 


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Definition
productive asset. it's opportunity cost is the time value of money 


Term
How does capital budgeting account for time value? 

Definition
by discounting future cash inflows and outflows to their present value 


Term
Cost allocation and the lumpiness of capacity resources 

Definition
estimates costs as if we can match supply and demand continuously and smoothly 


Term

Definition
strategic and operating budgets 


Term
Two steps of Capital Budgeting 

Definition
1 identify and evaluate individual investment proposals 2 prioritize the proposals and decide which one to execute 


Term
Four important elements of a capital expenditure decision 

Definition
1 initial outlay 2 estimated life and salvage value 3 timing and amounts of operating cash flows 4 cost of capital 


Term

Definition
all cost incurred to ready the asset for its intended use 


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Definition
the residual value from disposing of the asset at the end of its useful life 


Term

Definition
the opportunity cost for money (rate of return investors expect to receive from investment)
aka discount rate 


Term
Discounted cash flow techniques 

Definition
1 npv 2 internal rate of return 


Term

Definition
the total present value of all of its cash flows 


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Definition
the discount rate at which a project has zero NPV 


Term
IRR and unequal cash flows 

Definition
use excel or other computer programs to find the IRR 


Term
IRR with equal cash flows 

Definition
refer back to a201. it is the percentage that can be found on an annuity table 


Term
Three other methods used to evaluate expenditures on long lived resources 

Definition
payback, modified payback,and accounting rate of return 


Term

Definition
compute how long it takes to recoup the initial investment using undiscounted cash flows 


Term

Definition
computes the payback period using discounted cash flows, meaning that the method accounts for the time value of money 


Term
Accounting rate of return 

Definition
(average annual income from the project)/ (average annual investment) 


Term

Definition
annual net cash flows  annual depreciation expense 


Term

Definition
(open book  depreciation)= end book.
average = (open + end)/2 


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Definition


Term

Definition
the term of using depreciation to lower taxable income 


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Definition
tax rate x depreciation deduction in that year 


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Definition
the minimum expected rate of return of the management from any project 


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Definition
the ability to defer, abandon, expand, or contract an investment 


Term
increasing a firms future flexibility is a key... 

Definition
element of value, particularly for projects with considerable uncertainty in their estimated cash flows 


Term

Definition
complements standard techniques such as npv and irr with sophisticated mathematical models to place a quantitative value on flexibility 

