13 terms

accounting chapter 20

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