Chapter 10 vocabs

Chapter 10 vocabs - Internal rate of return (IRR) method A...

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David Trinh 15:49:57 Accounting-301 Monday 9-1pm Chapter 10 vocabs Annual rate of return method – The determination of the profitability of a capital expenditure, computed by dividing expected annual net income by the average investment Capital budgeting – The process of making capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the annual cash inflow produced by the investment Cost of capital – The average rate of return that the firm must pay to obtain borrowed and equity funds Discounted cash flow technique – A capital budgeting technique that considers both the estimated net cash flows from the investment and the time value of money Discount rate – The interest rate used in discounting the future new cash flows to determine present value Internal rate of return (IRR) – The rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows
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Unformatted text preview: Internal rate of return (IRR) method A method used in capital budgeting that result in finding the interest yield of the potential investment Net present value (NPV) The difference that results when the original capital outlay is subtracted from the discounted net cash flows Net present value (NPV) method A method used in capital budgeting in which net cash flows are discounted to their present value and then compared to the capital outlay required by the investment Post-audit A thorough evaluation of how well a projects actual performance matches the projections made when the project was proposed Profitability index A method of comparing alternative projects that takes into account both the size of the investment and its discounted future net cash flow. It is computed by dividing the present value of net future cash flows by the initial investment....
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