A number of terms are listed below:
Accounting rate of return.... accrual accounting rate of return (AARR)
Adjusted rate of return....... capital budgeting
Discount rate......... discounted cash flow (DCF)
Hurdle rate........... internal rate of return (IRR)
Investment decision....... investment programs
Investment projects....... investments
Net present value (NPV) method... payback method
(Opportunity) cost of capital... required rate of return (RRR)
Rate of return (ROR)....... time-adjusted rate of return
Return on investment (ROI)
Select the terms from the above list to complete the following sentences.
The goal of _______ _________ is to provide capacity in a planned and orderly manner that will match the predicted demand growth of the company and achieve a targeted ________ ______ ___________ on these investments. The determination of the ROR links closely to the operating income or profit on sales (Chapter 12). That is why ___________, (____________________ _________) affect the balance sheet, the income statement and the statement of cash flow. Capital budgeting requires a careful analysis the amount and timing of cash outflows and cash inflows. There are four methods from which a management team can choose, ___ _______ __(___), ________ ____ __ ______, _______, __________ _______ ____ __ ______ (or ______ __ _______(___)). The first two methods require the calculation of discounted cash flow. The NPVmethod requires that the management team determine what its________ ____ ____(___) must be (also called the discount rate, hurdle rate, or opportunity cost of capital). This discount rate is the return the team could expect from investing in a different project of similar risk. In contrast the IRR (sometimes called the ________ ____ __ ______) is ully determined by cash inflow and outflow. It is the rate at which the discounted net cash flow is zero. The _______ method is based on nominal, not discounted, cash flow. It is simply the total investment divided by cash inflow to determine the time it takes to recover the cost of the investment. The ____ is calculated by dividing the increase in an accrual, expected average operating income, by the cost of the initial investment.