The Accounting Rate of Return (ARR) is an accounting metric that measures the profitability of an organization by comparing the profit before interest and taxation to the capital employed over a specified period. Commonly used variants include profit after interest and taxation and average capital employed for the period.
Capital budgeting, also known as capital investment appraisal or investment appraisal, is the process by which an organization evaluates different investment projects to determine which is likely to provide the highest financial return.
The act of deciding between alternative courses of action. In the running of a business, accounting information and techniques are used to facilitate decision making, employing models like discounted cash flow, critical-path analysis, marginal costing, and breakeven analysis.
A decision model is a mathematical simulation of the variables and elements inherent in business decisions, aimed at achieving the objectives of an organization by analyzing the relationships and constraints among those variables.
The discount factor, also known as the present-value factor, is a figure used to determine the present value of future cash flows by considering the time value of money and a specific hurdle rate.
Discounted Cash Flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is then used to evaluate the potential for investment.
Discounted Cash Flow (DCF) is a financial valuation method used to appraise investments, architectures in capital budgeting, and other expenditure decisions by analyzing the predicted cash flow stream (incomes and outflows) and discounting them to present values using a specific cost of capital or hurdle rate.
Discounted Present Value (DPV) is a financial metric used to determine the current worth of a series of future cash flows, discounted back to their present value. It helps in evaluating the profitability and feasibility of investments and projects.
Discounting refers to the application of discount factors to cash flow projections in discounted cash flow analysis and the process of selling a bill of exchange before its maturity at a discounted price.
Economic appraisal is a method of capital budgeting that uses discounted cash flow techniques to determine the preferred investment by discounting the expected annual economic costs and benefits over the project's life. This method is particularly used for assessing governmental or quasi-governmental projects such as road, railway, and port developments.
Financial appraisal refers to the use of financial evaluation techniques to determine the preferred option among various alternatives, often employing discounted cash flow methods, ratio analysis, profitability index, or payback period.
An integral part of financial analysis, financial modelling involves creating representations of the financial performance of a business or project over time. These models aid in decision-making by simulating different scenarios and outcomes based on historical data and assumptions.
Free Cash Flow (FCF) is a crucial financial metric that indicates the amount of cash generated or consumed by a company after accounting for capital expenditures. It is instrumental for assessing a company's ability to pay dividends, reduce debt, acquire other businesses, or invest in growth opportunities.
Linear interpolation is a technique used to estimate an unknown value that falls within two known values in a linear relationship. This method is essential in fields like finance, particularly for calculating the internal rate of return (IRR).
Marginal Cost of Capital represents the cost of financing for the next dollar of capital raised. Different sources of capital, such as subordinated debt, can have varying costs. This metric is crucial for determining the hurdle rate in discounted cash flow and present value analysis.
Multiple solution rates refer to various rates of return that can be computed in certain appraisal scenarios using the Internal Rate of Return (IRR) method, particularly when cash flows vary between positive and negative values.
Net Present Value (NPV) is a method of determining whether the expected financial performance of a proposed investment promises to be adequate. It assesses the profitability of an investment by comparing the present value of future cash flows to the initial investment.
A method of capital budgeting where the value of an investment is calculated by determining the total present value of all cash inflows and outflows minus the initial investment cost.
Net Present Value (NPV) is a financial metric that measures the value of an investment or project by calculating the present value of expected future cash flows, discounted at a specified rate.
Present value, also known as discounted value, is the current worth of a sum of money or a stream of cash flows that will be received or paid in the future, calculated using a specific discount rate. It is an essential concept in finance, particularly in discounted cash flow (DCF) analysis.
Today's value of a future payment or stream of payments, discounted at an appropriate compound interest or discount rate; also known as the time value of money.
The Projection Period refers to the time duration used for estimating future cash flows and the resale proceeds from a proposed investment. Commonly used in financial analyses, it helps in forecasting and valuing investments, especially in real estate.
The required rate of return (RRR) represents the minimum return an organization deems necessary to justify an investment, expressed as a percentage.
Residual value, also referred to as disposal value or net residual value, represents the expected proceeds from the sale of an asset, net of the costs of sale, at the end of its estimated useful life.
The Reversionary Factor is a mathematical factor that indicates the present worth of one dollar to be received in the future. It is equivalent to the Present Value of 1.
A method used in decision making to evaluate the impact of variations in key variables on projected outcomes, helping to identify the degree of risk associated with a decision.
Stock valuation is the process of determining the intrinsic value of a company's stock, which helps investors make informed decisions about buying, selling, or holding shares.
The time value of money (TVM) concept, key to discounted cash flow calculations, posits that cash received earlier is worth more than the same amount received later due to the potential earning capacity of money. Conversely, future payments are valued less than payments made in the present.
Value in use is the present value of an asset's future cash flows derived from its continued use and eventual disposal, used primarily in impairment testing and asset valuation assessments.
