# Cost Accounting--Ch. 21

### 16 terms by Steve_Heizmann

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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.

Example: