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finop 301 chap 7
finop 301 chap 7 vocab words
19
Finance
Undergraduate 3
03/21/2011

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Term
investments in real assets
Definition
projects
Term
the analysis of projects within the firm, such as the purchase of new plant and equipment
Definition
capital budgeting analysis
Term
the minimum rate of return that an investor would accept in order to invest in a project of a particular risk
Definition
required rate of return
Term
a capital budgeting model that compares the PV of the projects benefits with the PV of the projects costs. The difference between benefits and costs is the net present value of the project
Definition
net present value
Term
benefits that would not have been received, or those costs that would not have been incurred, if a project had not been undertaken
Definition
incremental cash flows
Term
a capital budgeting model: a ratio constructed by dividing the PV of the projects benefits by the PV of the project's cost
Definition
profitability index
Term
a capital budgeting model represented by the discount rate that equates the present value of the costs with the present value of the benefits from the project
Definition
internal rate of return
Term
a graph that demonstrates the net present value of a project at different discount rates
Definition
net present value profile
Term
a capital budgeting model that answers the question: How long will it take to recoup the initial investment
Definition
payback
Term
a capital budgeting model defined by a ratio of average accounting profits over the project's life divided by some estimate of the average annual investment
Definition
accounting rate of return
Term
the reduction in the book value of an asset using accounting rules
Definition
depreciation
Term
projects whose accept-or-reject decision can be made without affecting other projects
Definition
accept-or-reject projects (independent projects)
Term
projects whose accept-or-reject decision affects other decisions
Definition
ranking projects (mutually exclusive projects)
Term
a shortage of investment capital caused either by an unwillingness of external entities to provide additional capital or by an internal decision that the firm must limit growth
Definition
capital rationing
Term
a project whose cash flow stream begins with one or more cash outflows and is followed only by cash flows
Definition
standard project
Term
a project whose cash flow stream begins with a cash inflow and is then followed by cash outflows
Definition
borrowing project
Term
a project whose cash flow stream switches through time from inflows to outflows or outflows to inflows more than once
Definition
multiple sign change project
Term
the required rate of return, or the interest rate used in the npv value model to discount future cash flows. It can also be used to determine that good projects are those whose internal rate of return is greater than, or hurdles over, the required rate of return
Definition
hurdle rate
Term
an attempt to measure the rate of return required by the firm to satisfy its sources of capital
Definition
weighted average cost of capital
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