Annuity:
A series, or stream, of identical cash flows.
Capital budgeting:
The process of planning significant outlays on projects that have long-term implications such as the purchase of new equipment or the introduction of a new product.
Compound interest:
The process of paying interest on interest in an investment.
Cost of capital:
The overall cost to an organization of obtaining investment funds, including the cost of both debt sources and equity sources.
Discount rate:
The rate of return that is used to find the present value of a future cash flow
Discounting:
The process of finding the present value of a future cash flow.
Internal rate of return:
The discount rate at which the net present value of an investment project is zero; thus, the internal rate of return represents the interest yield promised by a project over its useful life. This term is synonymous with time-adjusted rate of return.
Net present value:
The difference between the present value of the cash inflows and the present value of the cash outflows associated with an investment project.
Out-of-pocket costs:
Actual cash outlays for salaries, advertising, repairs, and similar costs.
Payback period:
The length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates.
Post-audit:
The follow-up after a project has been approved and implemented to determine whether expected results are actually realized.
Preference decision:
A decision as to which of several competing acceptable investment proposals is best.
Present value:
The estimated value now of an amount that will be received in some future period.
Profitability index:
The ratio of the present value of a project's cash inflows to the investment required.
Required rate of return:
The minimum rate of return that an investment project must yield to be acceptable.
Screening decision:
A decision as to whether a proposed investment meets some preset standard of acceptance.
Simple rate of return:
The rate of return computed by dividing a project's annual accounting net income by the initial investment required.
Time-adjusted rate of return:
This term is synonymous with Internal rate of return.
Working capital:
The excess of current assets over current liabilities.
Yield:
A term synonymous with Internal rate of return and time-adjusted rate of return.
