98 Glossary of Key Terms

capital budgeting

the process a business follows to evaluate potential major projects or investments

discounted payback period

the length of time it will take for the present value of the future cash inflows of a project to equal the initial cost of the investment

equal annuity approach

a method of comparing projects of different lives by assuming that the projects can be repeated forever

internal rate of return (IRR)

the discount rate that sets the NPV of a project equal to zero

modified internal rate of return (MIRR)

the yield that sets the future value of the cash inflows of a project equal to the present value of the cash outflows of the project

mutually exclusive projects

projects that compete against each other so that when one project is chosen, the other project cannot be done

net present value (NPV)

the present value of the cash inflows of a project minus the present value of the cash outflows of the project

payback period

the length of time it will take for a company to make enough money from an investment to recover the initial cost of the investment

profitability index (PI)

the present value of cash inflows divided by the present value of cash outflows

replacement chain approach

a method of comparing projects of differing lives by repeating shorter projects multiple times until they reach the lifetime of the longest project

Attribution:

This chapter is from “Principles of Finance”  https://openstax.org/books/principles-finance/pages/1-why-it-matters by Dahlquist and Knight. This book is licensed under the CC-BY 4.0 license. 2022 OpenStax.

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