Ch 12

discount rate

a generic term that refers to the rate used in capital budgeting for converting future cash flows to a present-value basis

yield to maturity

a long-term bond yield (rate of return) expressed as an annual rate

economic value added (EVA)

a measure of financial performance designed to approximate an entity's economic profit; calculated often as net operating profit after taxes less an imputed charge based on the level of invested capital.

beta coefficient

a measure of the sensitivity of a given stock's return to fluctuations in the overall market; average beta of all stocks is 1; betas > 1 imply greater sensitivity to market fluctuations

analytic hierarchy process (AHP)

a multicriteria decision technique that can combine qualitative & quantitative factors in the overall evaluation of decision alternatives

capital investment

a project that involves a large expenditure of funds & expected future benefits over a number of years

profitability index (PI)

a rate-of-return measure, defined as the ratio of the NPV of a project to the original investment outlay for the project

discounted cash flow (DCF) models

represent capital-budgeting decision models that incorporate the present value of future cash flows

real options

represent flexibilities and/or growth opportunities embedded in capital-investment projects

net working capital

(as used in a capital budgeting context) is equal to current assets other than cash, less current liabilities

hurdle rate (required rate of return)

(for capital budgeting) it represents the minimum acceptable rate of return on an investment acceptable rate of return on an investment

modified internal rate of return (MIRR)

IRR adjusted to account for an assumed rate of return associated with interim project cash inflows

scenario analysis

an attempt to look at how a proposed investment project would fare under different combinations of variables called scenarios

weighted average cost of capital (WACC)

an average of the (after-tax) cost of debt & equity capital for a firm; in general WACC is the appropriate discount rate to use for future cash flows associated with "average-risk" projects

Internal rate of return (IRR)

an estimate of the true rate of return on an investment

Monte Carlo simulation

an extension to scenario analysis in which a computer provides a distribution of possible outcomes.

mutually exclusive projects

an extreme form of project interdependence; the acceptance of one investment alternative precludes the acceptance of one or more other alternatives

post-audit

an in-depth review of a completed capital-investment project

present value payback period

an investment is the length of time required for the cumulative present value of after-tax cash inflows to recover the initial investment outlay

present value (PV)

current equivalent value of future cash flows; aka time adjusted value

capital asset pricing model (CAPM)

depicts the risk-return relationship for equity securities & can be used to estimate the required rate of return on equity for a given company CAPM= risk free rate+ risk premium

accounting (book) rate of return (ARR)

equal to some measure of accounting profit to some measure of investment in the project

breakeven after-tax cash flow

equals the minimum annual after-tax cash inflows needed for an investment project to be acceptable.

capital budget

for a given period consists of a listing of approved investment projects as well as anticipated cash outflows associated with these projects

non-DCF models

for capital budgeting are those that are not based on the present value of future cash flows

real assets

investments in both tangible property & intangible property

multicriteria decision model

one that includes more than one decision criterion

capital structure

refers to the means by which a company is financed; the mix between debt and equity capital

capital rationing

the case where investment capital for a given accounting period is limited- hence the need for these funds to be "rationed"

net present value (NPV)

the difference b/w the present value of future cash inflows and the present value of future cash outflows of an investment project

payback period

the length of time required for the cumulative after-tax cash inflows from an investment to recover the initial investment outlay

strategic control system

the process an organization uses to monitor the progress of the organization in terms of accomplishing the strategic goals of the organization

capital budgeting

the process of identifying, evaluating, selecting, & controlling capital investments

sensitivity analysis

the process of selectively varying a key input variable identify the range over which a capital-budgeting decision is valid

market risk premium

the spread b/w the expected rate of return on a market portfolio of securities and the risk-free rate of return (Rm-Rf)

average-risk projects

those that approximate the risk of the firms existing assets & operations; the WACC is used to evaluate average-riskinvestment projects