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Lecture

ADMS 2510 Lecture Notes - Working Capital, Payback Period, Capital Budgeting


Department
Administrative Studies
Course Code
ADMS 2510
Professor
Alison Beavis

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Chapter 13
Capital budgeting: The process of planning significant outlays on projects that have long-term implications,
such as the purchase of new equipment or the introduction of a new product.
Screening decision: A decision as to whether a proposed investment meets some pre-established profitability
hurdle.
Preference decision: A decision as to which of several competing acceptable investment proposals is best.
Net present value: The difference between the present value of the cash inflows and the present value of the
cash outflows associated with an investment project.
Working capital: The excess of current assets over current liabilities.
Cost of capital: The average rate of return companies must pay to long-term creditors and shareholders for the
use of their funds.
Out of pocket costs: Actual cash outlays for operating costs.
Internal rate of return: The discount rate at which the net present value of an investment project is zero.
Required rate of return: The minimum rate of return that an investment project must yield to be acceptable.
Project profitability index: The ratio of the present value of a project's cash inflows to the investment
required.
Post-audit: Following up on a project that has been approved to see if expected results are being realized.
Payback period: The length of time that it takes for a project to recover its initial cost from the net cash
inflows that it generates.
Simple rate of return: The rate of return computed by dividing a project's annual operating income by the
initial investment required.
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