BUS 215 Chapter Notes - Chapter 13: Earnings Before Interest And Taxes, Payback Period, Cash Flow
Chapter 13 Notes
• Capital budgeting: how managers plan significant investments in projects
that have long-term implications such as the purchase of new equipment
or the introduction of new products
o Screening decisions: whether a proposed project is acceptable
o Preference decisions: selecting from among several acceptable
alternatives
• 3 different cash flows:
o 1. Immediate cash flow in form of initial investment
o 2. Working capital: current assets less current liabilities
o 3. Periodic outlays for repairs and maintenance and additional
operating costs
• Time value of money: a dollar today is worth more than a dollar a year
from now if for no other reason that you could put the dollar in a bank
today and have more than a dollar a year from now
• Payback period: length of time that it takes for a project to recover its
initial cost from the net cash inflows that it generates
o Expressed in years
• Net present value: difference between the present value of cash flows
that determines whether or not a project is an acceptable investment
• Cost of capital: the average rate of return that the company must pay to
its long-term creditors and its shareholders for the use of their funds
• Internal rate of return: rate of return of an investment project over its
useful life
o Discount ate that euates the pesent value of a poject’s cash
outflows with the present value of its cash inflows
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