16.9: Key Terms
- Page ID
- 94766
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- capital budgeting
- the process a business follows to evaluate potential major projects or investments
- discounted payback period
- the length of time it will take for the present value of the future cash inflows of a project to equal the initial cost of the investment
- equal annuity approach
- a method of comparing projects of different lives by assuming that the projects can be repeated forever
- internal rate of return (IRR)
- the discount rate that sets the NPV of a project equal to zero
- modified internal rate of return (MIRR)
- the yield that sets the future value of the cash inflows of a project equal to the present value of the cash outflows of the project
- mutually exclusive projects
- projects that compete against each other so that when one project is chosen, the other project cannot be done
- net present value (NPV)
- the present value of the cash inflows of a project minus the present value of the cash outflows of the project
- payback period
- the length of time it will take for a company to make enough money from an investment to recover the initial cost of the investment
- profitability index (PI)
- the present value of cash inflows divided by the present value of cash outflows
- replacement chain approach
- a method of comparing projects of differing lives by repeating shorter projects multiple times until they reach the lifetime of the longest project