Term
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Definition
| the set of tools companies use to evaluate the value of large scale expenditures |
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Term
| Drawbacks of using allocation for decision making |
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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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Term
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Definition
| arises because a dollar today is worth more than a dollar tomorrow |
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Term
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Definition
| productive asset. it's opportunity cost is the time value of money |
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Term
| How does capital budgeting account for time value? |
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Definition
| by discounting future cash inflows and outflows to their present value |
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Term
| Cost allocation and the lumpiness of capacity resources |
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Definition
| estimates costs as if we can match supply and demand continuously and smoothly |
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Term
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Definition
| strategic and operating budgets |
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Term
| Two steps of Capital Budgeting |
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Definition
1 identify and evaluate individual investment proposals
2 prioritize the proposals and decide which one to execute |
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Term
| Four important elements of a capital expenditure decision |
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Definition
1 initial outlay
2 estimated life and salvage value
3 timing and amounts of operating cash flows
4 cost of capital |
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Term
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Definition
| all cost incurred to ready the asset for its intended use |
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Term
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Definition
| the residual value from disposing of the asset at the end of its useful life |
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Term
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Definition
the opportunity cost for money (rate of return investors expect to receive from investment)
aka discount rate |
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Term
| Discounted cash flow techniques |
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Definition
1 npv
2 internal rate of return |
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Term
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Definition
| the total present value of all of its cash flows |
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Term
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Definition
| the discount rate at which a project has zero NPV |
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Term
| IRR and unequal cash flows |
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Definition
| use excel or other computer programs to find the IRR |
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Term
| IRR with equal cash flows |
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Definition
| refer back to a201. it is the percentage that can be found on an annuity table |
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Term
| Three other methods used to evaluate expenditures on long lived resources |
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Definition
| payback, modified payback,and accounting rate of return |
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Term
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Definition
| compute how long it takes to recoup the initial investment using undiscounted cash flows |
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Term
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Definition
| computes the payback period using discounted cash flows, meaning that the method accounts for the time value of money |
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Term
| Accounting rate of return |
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Definition
| (average annual income from the project)/ (average annual investment) |
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Term
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Definition
| annual net cash flows - annual depreciation expense |
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Term
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Definition
(open book - depreciation)= end book.
average = (open + end)/2 |
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Term
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Definition
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Term
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Definition
| the term of using depreciation to lower taxable income |
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Term
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Definition
| tax rate x depreciation deduction in that year |
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Term
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Definition
| the minimum expected rate of return of the management from any project |
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Term
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Definition
| the ability to defer, abandon, expand, or contract an investment |
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Term
| increasing a firms future flexibility is a key... |
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Definition
| element of value, particularly for projects with considerable uncertainty in their estimated cash flows |
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Term
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Definition
| complements standard techniques such as npv and irr with sophisticated mathematical models to place a quantitative value on flexibility |
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