SESSION:16 How Companies Think about InvestingKey Terms – GU4L Leadership Institute

Session:16 How Companies Think about Investing

Key Terms

Principles of Finance | Leadership Development – Micro-Learning Session

Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-finance

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

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