Saturday, February 22, 2014

Accounting Terms: Incremental Analysis and Capital Budgeting




Unit 26 -- Incremental Analysis and Capital Budgeting

Annual rate of return method
determines the profitability of a capital expenditure by dividing expected annual net income by the average investment.
Capital budgeting
 is the process of making capital expenditure decisions in business. Capital expenditures usually entail the purchasing of Plant Property and Equipment.
Cash payback
is a technique that identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment.

Cost of capital
is the rate of return that management expects to pay on all borrowed and equity funds.

Discounted cash flow
is a technique that considers both the estimated total net cash flows from the investment and the time value of money.

Incremental analysis
is the process of identifying the financial data that change under alternative courses of action.

Internal rate of return (IRR)
is the rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows.

Internal rate of return (IRR) method
is used to find the interest yield of the potential investment.


Net present value (NPV)
The difference that results when the original capital outlay is subtracted from the discounted net cash flows.
Net present value (NPV)
is a method that discounts net cash flows to their present value and then compares that present value to the capital outlay required by the investment.
Opportunity cost
is the potential benefit that may be obtained from following an alternative course of action.
Required rate of return
is the rate that is generally based on the company’s cost of capital.
Sunk cost
is a cost that cannot be changed by any present or future decision.

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