Net present valueNet present value (NPV), also known as net present worth (NPW) is a method for assessing whether future amounts of money are worth more or less than the cost of an investment made today. It is widely used in finance, economics, and project evaluation to judge whether a planned activity is expected to create value. NPV works by converting future cash flows into their “present value,” recognising that money available now is more valuable than the same amount received later.
Modified internal rate of returnThe modified internal rate of return (MIRR) is a financial measure of an investment's attractiveness. It is used in capital budgeting to rank alternative investments of unequal size. As the name implies, MIRR is a modification of the internal rate of return (IRR) and as such aims to resolve some problems with the IRR. Problems associated with the IRRWhile there are several problems with the IRR, MIRR resolves two of them.Average accounting returnThe average accounting return (AAR) is the average project earnings after taxes and depreciation, divided by the average book value of the investment during its life. Approach to making capital budgeting decisions involves the average accounting return (AAR). There are many different definitions of the AAR. However, in one form or another, the AAR is always defined as: Some measure of average accounting profit divided by some measure of average accounting value.
Real options valuationReal options valuation, also often termed real options analysis, (ROV or ROA) applies optionvaluation techniques to capital budgeting decisions. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project.Accounting rate of returnThe accounting rate of return, also known as average rate of return, or ARR, is a financial ratio used in capital budgeting. The ratio does not take into account the concept of time value of money. ARR calculates the return, generated to net income of the proposed capital investment. The ARR is a percentage return. Say, if ARR = 7%, then it means that the project is expected to earn seven cents out of each dollar invested (yearly).
Payback periodPayback period in capital budgeting refers to the time required to recoup the funds expended in an investment, or to reach the break-even point. For example, a $1000 investment made at the start of year 1 which returned $500 at the end of year 1 and year 2 respectively would have a two-year payback period. Payback period is usually expressed in years.Internal rate of returnInternal rate of return (IRR) is a method of calculating an investment's rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or financial risk. The method may be applied either ex-post or ex-ante. Applied ex-ante, the IRR is an estimate of a future annual rate of return. Applied ex-post, it measures the actual achieved investment return of a historical investment.
Corporate financeCorporate finance is an area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Correspondingly, corporate finance comprises two main sub-disciplines.
Equivalent annual costIn finance, the equivalent annual cost (EAC) is the cost per year of owning and operating an asset over its entire lifespan. It is calculated by dividing the negative NPV of a project by the "present value of annuity factor": EAC=−NPVAt,r{\displaystyle \mathrm {EAC} =-{\frac {\mathrm {NPV} }{A_{t,r}}}}, where At,r=1−1(1+r)tr{\displaystyle {A_{t,r}}={\frac {1-{\frac {1}{(1+r)^{t}}}}{r}}}where r is the annual interest rate and t is the number of years.
Profitability indexProfitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. Under capital rationing, PI method is suitable because PI method indicates relative figure i.e. ratio instead of absolute figure.Capital managementCapital management refers to the area of financial management that deals with capital assets, which are assets that have value as a function of economic production, or otherwise are of utility to other economic assets.
Fixed investmentFixed investment in economics is the purchase of newly produced physical asset, or, fixed capital. It is measured as a flow variable – that is, as an amount per unit of time. Thus, fixed investment is the sum of physical assets such as machinery, land, buildings, installations, vehicles, or technology.
Capital (economics)In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, "the nation's capital stock includes buildings, equipment, software, and inventories during a given year." Capital is a broad economic concept representing produced assets used as inputs for further production or generating income.*As an Amazon Associate I earn from qualifying purchases.