Key Terms
Capital investment (capital budgeting)
A company's contribution of funds toward acquiring long-term assets for further growth. Includes new equipment, machiner
Capital expenditure
Spending used to grow the business and produce a future economic benefit. NOT the same as an operating expense.
Operating expense
A regularly-occurring expense used to maintain current operations.
Non-financial factors include
Customer satisfaction, employee morale, regulatory compliance, reputation.
Alternatives
The options available for investment (all possible choices for a given need).
Baseline criteria
Measurement methods used to differentiate among investment alternatives. Capital investment / capital budgeting: company
Screening decision
Removes alternatives that fail to meet minimum standards. Think of it as a pass/fail filter.
Preference decision
Compares alternatives that passed screening; ranks them by importance, feasibility, or desirability.
Definition
The discount rate at which NPV equals zero. It is the actual rate of return a project earns.
What it measures
Time to recoup, not profitability.
Cash flow
Money coming into or out of the company from business activity. Cash inflow: money received OR cost savings from a capit
Even cash flows
Initial investment: $150,000 Annual cash flow: $20,000 Payback = $150,000 / $20,000 = 7.5 years
Uneven cash flows
Initial investment: $40,000 Year 1: $10,000 | Running total: $10,000 Year 2: $10,000 | Running total: $20,000 Year 3: $5
Partial year
$2,500 / $7,500 = 0.33 years Total payback: 5.33 years
Initial investment
$50,000 | Annual cash flow: $15,000 Payback = $50,000 / $15,000 = 3.33 years