Finance Chapter 9 Basic Concepts

Term Answer Description Replacement decision A. This analysis is conducted following the implementation of an accepted capital project and is intended to improve a firm's forecasting process and to improve the firm's operations. Net present value The discount rate at which the present value of a project's cash outflows is equal to the present value of the sum of its future cash inflows, assuming that cash flows are reinvested at the firm's required rate of return B. NPV profile C. A term used to describe a firm's cost of capital; this value is used as the hurdle against which a project's internal rate of return is compared to ascertain whether a project is acceptable Post-audit analysis D. A curve showing the relationship between a projects's net present value (NPV) and various discount rates E. The discount rate that equates the present value of a capital project's expected cash inflows and its initial cost. Internal rate of return F. The process of analyzing projects and deciding which are acceptable investments and which actually should be purchased Capital budgeting Independent project G. A capital budgeting method whose key value is calculated as the difference between the discounted value of an asset's future cash inflows and its purchase price Payback period H. The acceptance or rejection decision made for this type of project does not affect the acceptance or rejection of another proposed capital project. Required rate of return I. A capital budgeting analysis that determines if a capital asset should be purchased to take the place of a worn out, damaged, or obsolete existing asset. Modified internal rate of return . This value is calculated by summing a project's expected annual cash inflows until their cumulative value equals the project's initial cost