Cost Accounting – 12th Edition

Ch 21 Terms

 

Accounting rate of return – See accrual accounting rate-of-return (AARR)

 

Accrual accounting rate to return (AARR)– Divides an accrual accounting measure of average annual income of a project by an accrual accounting measure of its investment. Also called accounting rate of return or return on investment (ROI).

 

Capital budgeting – The making of long-run planning decisions for investments in projects.

 

Cost of capital– See required rate of return (RRR).

 

Discounted cash flow (DCF) method – Capital budgeting methods that measure all expected future cash inflows and outflows of a project as if they occurred at a single point in time.

                                                                                                                                          

Discount rate – See required rate of return (RRR).

 

Hurdle rate –See required rate of return (RRR).

 

Inflation – The decline in the general purchasing power of the monetary unit.

 

Internal rate-of-return (IRR) method- Capital budgeting DCF method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of its expected cash outflows.

 

Net present value (NPV) method – Capital budgeting DCF method that calculates the expected monetary gain or loss from a project by discounting all expected future cash inflow and outflows to the present point in time, using the required rate of return.

 

Nominal rate of return – Made up of three elements: (a) a risk-free element when there is no expected inflation, (b) a business-risk element, and (c) and an inflation element.

 

Opportunity cost of capital- See required rate of return (RRR)

 

Payback method – Capital budgeting method that measures the time it will take to recoup, in the form of expected future cash flows, the net initial investment in a project.

 

Real rate of return – The rate of return demanded to cover investment risk (with no inflation. It has a risk-free element and a business-risk element.

 

Required rate of return (RRR)– The minimum acceptable annual rate of return on an investment.  Also called the discount rate, cost of capital , or opportunity.

 

Time value of money- Takes into account that a dollar (or any other monetary unit) received today is worth more than a dollar received at any future time.