13 terms

accounting rate of return

a measure of profitability computed by dividing the average annual operating income from an asset by the average amount invested in the asset

annuity

a stream of equal installments made at equal time intervals

capital budgeting

the process of making capital investment decisions. Companies make capital investments when they acquire capital assets used for a long period of time

capital rationing

choosing among alternative capital investments due to limited funds

compound interest

interest computed on the principal and all interest earned to date

discount rate

managements minimum desired rate of return investment. Also called the rate of return

internal rate of return

the rate of return that a company can expect to earn by investing in a capital asset. The interest rate that makes the npv of the investment equal to zero

net present value

the difference between the present value of the investments net cash inflows and the investments cost

payback

the length of time it takes to recover, in net cash inflows, the cost of capital outlay

post-audits

comparing a capital investments actual net cash inflows to its projected net cash inflows

present value index

an index that computes the number of dollars returned for every dollar invested, with all calculations performed in present value dollars. Computed as present value of net cash inflows divided by investment

required rate of return

the rate an investment must meet or exceed in order to be acceptable

simple interest

interest computed only on the principal amount