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Principles of Finance

Key Terms

Principles of FinanceKey Terms
capital budgeting
the process a business follows to evaluate potential major projects or investments
discounted payback period
the length of time it will take for the present value of the future cash inflows of a project to equal the initial cost of the investment
equal annuity approach
a method of comparing projects of different lives by assuming that the projects can be repeated forever
internal rate of return (IRR)
the discount rate that sets the NPV of a project equal to zero
modified internal rate of return (MIRR)
the yield that sets the future value of the cash inflows of a project equal to the present value of the cash outflows of the project
mutually exclusive projects
projects that compete against each other so that when one project is chosen, the other project cannot be done
net present value (NPV)
the present value of the cash inflows of a project minus the present value of the cash outflows of the project
payback period
the length of time it will take for a company to make enough money from an investment to recover the initial cost of the investment
profitability index (PI)
the present value of cash inflows divided by the present value of cash outflows
replacement chain approach
a method of comparing projects of differing lives by repeating shorter projects multiple times until they reach the lifetime of the longest project
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