Ch. 13 Definitions

Discounted Payback (DPB)

A capital budgeting method that generates decision rules and associated metrics that choose projects based on how quickly they return their initial investment plus interest.

Payback (PB)

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based on how quickly they return their initial investment.

Internal Rate of Return (IRR)

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based on the implicit expected geometric average of a project's rate of return.

Profitability Index (PI)

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric.

Interest-Rate-Cognizant

A decision-making process that includes the cost of capital calculation.

NPV Profile

A graph of a project's NPV as a function of the cost of capital.

Normal Cash Flows

A set of cash flows with all outflows occurring at the beginning of the set.

Net Present Value (NPV)

A technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows.

Mutually Exclusive Projects

Groups or pairs of projects where you can accept one but not all.

Modified Internal Rate of Return (MIRR)

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule.