Set 1
The rate of return obtained by dividing the average accounting net income by the original investment
Accounting rate of return (ARR)
A series of future cash flows
Annuity
The process of making capital investment decisions
Capital budgeting
The process of planning, setting goals and priorities, arranging financing, and identifying criteria for making long-term investments
Capital investment decisions
Paying interest on interest
Compounding of interest
The cost of investment funds, usually viewed as a weighted average of the costs of funds from all sources
Cost of capital
The factor used to convert a future cash flow to its present value
Discount factor
The rate of return used to compute the present value of future cash flows
Discount rate
Future cash flows expressed in present value terms
Discounted cash flows
The act of finding the present value of future cash flows
Discounting
Capital investment models that explicitly consider the time value of money in identifying criteria for accepting and rejecting proposed projects
Discounting models
The value that will accumulate by the end of an investment's life if the investment earns a specified compounded return
Future value
Projects that, if accepted or rejected, will not affect the cash flows of another project
Independent projects
The rate of return that equates the present value of a project's cash inflows with the present value of its cash outflows (i.e., it sets the NPV equal to zero). Also, the rate of return being earned on funds that remain internally invested in a project
Internal rate of return (IRR)
Projects that, if accepted, preclude the acceptance of competing projects
Mutually exclusive projects
The difference between the present value of a project's cash inflows and the present value of its cash outflows
Net present value (NPV)
Capital investment models that identify criteria for accepting or rejecting projects without considering the time value of money
Nondiscontinuing models
The time required for a project to return its investment
Payback period
A follow-up analysis of an investment decision, comparing actual benefits and costs with expected benefits and costs
Postaudit
The current value of a future cash flow. It represents the amount that must be invested now if the future cash flow is to be received, assuming compounding at a given rate of interest
Present value
The minimum rate of return that a project must earn in order to be acceptable. Usually corresponds to the cost of capital
Required rate of return