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Define each of the following terms: a. Capital budgeting; regular payback period; discounted payback period b. Independent

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Define each of the following terms:

a. Capital budgeting; regular payback period; discounted payback period

b. Independent projects; mutually exclusive projects

c. DCF techniques; net present value (NPV) method; internal rate of return (IRR) method; profitability index (PI)

d. Modified internal rate of return (MIRR) method

e. NPV profile; crossover rate

f. Non-normal cash flow projects; normal cash flow projects; multiple IRRs

g. Reinvestment rate assumption

h. Replacement chain; economic life; capital rationing; equivalent annual annuity (EAA)


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...
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a Capital budgeting is the whole process of analyzing projects and deciding whether they should be included in the capital budget This process is of fundamental importance to the success or failure of ...View the full answer


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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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