Cost Accounting--Ch. 21

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Accounting Rate of Return

Another term for accrual accounting rate of return (AARR)

Accrual Accounting Rate of Return

Divides an accrual accounting measure of average annual income of a project by an accrual accounting measure of its investment.

Capital Budgeting

The making of long-run planning decisions for investments in projects

Cost of Capital

Another term for required rate of return. Cost of capital

Discount Rate

Another term for required rate of return. Discount rate

Discounted Cash Flow (DCF) Methods

Capital budgeting methods that measure all expected future cash inflows and outflows of a project as if they occurred at a single point in time.

Hurdle Rate

Another term for required rate of return. Hurdle rate

Inflation

The decline in the general purchasing power of the monetary unit, such as dollars.

Internal Rate of Return (IRR) Method

Capital budgeting discounted cash flow (DCF) method that calculates the discount rate at which the present value of expected cash inflows from a projects equals the present value of its expected cash outflows.

Net Present Value (NPV) Method

Capital budgeting discounted cash flow (DCF) method the calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time, using the required rate of return.

Nominal Rate of Return

Made up of three elements: a.) the risk-free element when there is no expected inflation, b.) a business-risk element, and c.) an inflation element.

Opportunity Cost of Capital

Another term for required rate of return. Opportunity cost of capital

Payback Method

Capital budgeting method that measures the time it will take to recoup, in the form of expected future cash flows, the net initial investment in the project.

Real Rate of Return

The rate of return demanded to cover investment risk (with no inflation). It has a risk-free element and a business-risk element.

Required Rate of Return (RRR)

The minimum acceptable annual rate of return on an investment.

Time Value of Money

Takes into account that a dollar (or any other monetary unit) received today is worth more than a dollar received in any future time.

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