Managerial Accounting Capital Budgeting
The long term planning for making and financing investments that affect financial results over a period longer than one year.
Required Rate of Return (Discount Rate)
The minimum desired rate of return, based on the firm’s cost of capital. Think ofot as an internal interest rate, its a percent.
A decision made asking, does a project meet or exceed a company’s required rate of return.
Selecting among a number of acceptable number of projects.
Time Value of Money
Money today is worth more than money received in the future. Money to be received in the future must be “discounted” to see what it is worth today.
Discounted Cash Flow Models (DFC)
A type of capital budgeting model that focuses on cash inflows and outflows while taking into account the time value of money.
Net Present Value Method (NPV)
A discounted cash flow approach to capital budgeting that computes the present value of all expected future cash flows using a minimum desired rate of return. This is a dollar amount.
Internal Rate of Return (IRR)
A capital budgeting model that determines the interest rate at which the NPV equals 0. This is a percent.
A non-discounted cash flow model that determines how many periods it takes for a project to recover its initial cost.
Project Profitability Index (PPI)
A preference decision tool that compares the net present value of a project with its initial investment. Projects with a higher PPI would be selected first.
The current value of an amount to be received in the future.
A series of equal cash flows paid or received at equal intervals.