| average accounting return | The average project earnings after taxes and depreciation divided by the average book value of the investment during its life.
|
 |
|
|
| basic IRR rule | Accept the project if IRR is greater than the discount rate; reject the project if IRR is less than the discount rate.
|
|
|
|
| capital rationing | The case where funds are limited to a fixed dollar amount and must be allocated among competing projects.
|
|
|
|
| discounted payback period method | An investment decision rule in which the cash flows are discounted at an interest rate and the payback rule is applied on these discounted cash flows.
|
|
|
|
| incremental IRR | IRR on the incremental investment from choosing a large project instead of a smaller project.
|
|
|
|
| independent project | A project whose acceptance or rejection is independent of the acceptance or rejection of other projects.
|
|
|
|
| internal rate of return | A discount rate at which the net present value of an investment is zero. The IRR is a method of evaluating capital expenditure proposals.
|
|
|
|
| mutually exclusive investments | Investment decisions in which the acceptance of a project precludes the acceptance of one or more alternative projects.
|
|
|
|
| NPV rule | Invest in all positive NPV opportunities.
|
|
|
|
| payback period rule | An investment decision rule which states that all investment projects that have payback periods equal to or less than a particular cutoff period are accepted, and all of those that pay off in more than the particular cutoff period are rejected. The payback period is the number of years required for a firm to recover its initial investment required by a project from the cash flow it generates.
|
|
|
|
| profitability index | A method used to evaluate projects. It is the ratio of the present value of the future expected cash flows after initial investment divided by the amount of the initial investment.
|
|
|
|
| value-additivity | In an efficient market the value of the sum of two cash flows is the sum of the of the individual cash flows.
|