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.
Capital rationing occurs when managers have insufficient funds to invest in all projects with a positive net present value (NPV). It requires prioritization of projects to maximize NPV. It is classified into soft and hard capital rationing depending on whether constraints are self-imposed or external, respectively.
Current-value accounting is a method that values assets based on their current market value, taking into account changes in specific prices rather than general price levels. This technique is essential for providing a more precise and timely reflection of an entity's financial situation.
In current-cost accounting, the deprival value of an asset corresponds to the lower value between its replacement cost and its recoverable amount, which is the higher value between its net realizable value and net present value.
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.
Economic income is calculated by comparing the net present value of future cash flows at the beginning and end of a period. It measures the wealth generated by an entity's operations and can provide a more accurate reflection of financial performance than accounting income.
An in-depth look at incremental cash flow, its significance in differential analysis, how it impacts decision-making, and real-life applications.
An interest rate that gives a net present value (NPV) of zero when applied to a projected cash flow of an asset, liability, or financial decision.
Investment Analysis is the study and evaluation of the potential return and feasibility of a proposed investment. This process assists investors in making informed decisions by analyzing various metrics and methods to project future returns.
Lifetime Value (LTV) is a metric used to forecast the future profitability a customer will bring to a business over the entire duration of their relationship with the company. It is pivotal in making strategic decisions related to marketing, customer acquisition, and retention.
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).
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.
The present-value factor is an accounting term that represents the multiplier used to determine the present value of a series of future cash flows, considering a specific discount rate.
A method for valuing the entire equity in a company, based on the net present value of future cash flows. Developed by Alfred Rappaport in the 1980s, Shareholder Value Analysis (SVA) emphasizes the time value of money and focuses on future performance rather than past accounting records.
Subjective goodwill of an enterprise is calculated by deducting its net tangible assets from the net present value of its estimated future cash flows.
Windfall gains and losses refer to unexpected increases or decreases in value arising from actual or prospective receipts that differ from initial predictions or due to changes in net present value of the receipts.
