Capital Investment Basics
This type of investment decision involves analyzing proposed new investments in land, buildings, and equipment.
What is capital budgeting?
This method measures ROI in dollar terms by summing the present values of a project’s cash flows.
What is Net Present Value (NPV)?
These are the types of cash flows that should be the focus of project analysis.
What are incremental cash flows?
This is the price paid to obtain debt capital.
What is the interest rate?
This project classification includes replacing worn-out or damaged equipment.
What is mandatory replacement?
This is the discount rate that makes a project’s NPV equal zero.
What is the Internal Rate of Return (IRR)?
This type of cost should be included in cash flow estimation.
Cost of Capital or Opportunity Cost
This form of financing is supplied by owners, shareholders, or the community.
What is equity financing?
This is the goal of financial analysis in investor-owned businesses.
Contribute to owners’ wealth
This method calculates the time required to recover the initial investment.
What is the payback period?
This analysis shows how changes in one input variable affect profitability.
What is sensitivity analysis?
This is the mix of debt and equity financing used by a business.
What is capital structure?
This is the term for the rate that could be earned on alternative investments of similar risk.
What is the opportunity cost of capital?
This analysis helps interpret cash flows by identifying when cumulative cash inflows equal the initial investment.
What is breakeven analysis?
This analysis considers best, worst, and most likely cases to assess project risk.
What is scenario analysis?
This method estimates the cost of equity by adding a risk premium to the cost of debt.
What is the debt cost plus risk premium method?
This post-decision process helps improve forecasts and reduce losses by monitoring a project’s performance over time.
What is a post audit?
This matrix-based method incorporates both financial and non-financial factors in capital investment decisions.
What is project scoring?
This statistical measure of risk is calculated as the standard deviation divided by the expected NPV.
What is the coefficient of variation (CV)?
This is the weighted average of the costs of a business's debt and equity financing.
What is the corporate cost of capital (CCC)?