Term
| Accounting rate of return (ARR) |
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Definition
| a rate of return on a capital project based on average net income divided by average book value over the project's life; also called the book value rate of return |
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Term
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Definition
| the process of choosing the productive assets in which the firm will invest |
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Term
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Definition
| a situation where a firm does not have enough capital to invest in all attractive projects and must therefore ration capital |
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Term
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Definition
| projects whose acceptance depends on the acceptance of other projects |
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Term
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Definition
| the required rate of return for a capital investment |
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Term
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Definition
| the discount rate at which the NPV profiles of two projects cross and, thus, at which the NPVs of the projects are equal |
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Term
| Discounted payback period |
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Definition
| the length of time required to recover a project's initial cost, accounting for the time value of money |
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Term
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Definition
| projects whose cash flows are unrelated |
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Term
| Internal rate of return (IRR) |
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Definition
| the discount rate at which the present value of a project's expected cash inflows equals the present value of the project's outflows; it is the discount rate at which the project's NPV equals zero |
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Term
| Modified internal rate of return (MIRR) |
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Definition
| an internal rate of return (IRR) measure which assumes that cash inflows are reinvested at the opportunity cost of capital until the end of the project |
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Term
| Mutually exclusive projects |
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Definition
| projects for which acceptance of one precludes acceptance of the other |
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Term
| Net present value (NPV) method |
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Definition
| a method of evaluating a capital investment project which measures the difference between its cost and the present value of its expected cash flows |
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Term
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Definition
| a graph showing NPV as a function of the discount rate |
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Term
| Opportunity cost of capital |
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Definition
| the return an investor gives up when his or her money is invested in one asset rather than the best alternative asset |
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Term
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Definition
| the length of time required to recover a project's initial cost |
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Term
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Definition
| an audit to compare actual project results with the results projected in the capital budgeting proposal |
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