Finance Essay

1800 WordsDec 16, 20118 Pages
Chapter 8 * Capital budgeting : the process of evaluating and selecting long-term investments consistent with the firm’s goal of maximizing owner wealth. * Operating expenditure : an outlay of funds by the firm resulting in benefits received within one year. * Capital budgeting : five distinct but interrelated steps: proposal generations, review and analysis, decision-making, implementation and follow-up. * Independent projects : projects with cash flows that are unrelated or independent of one another; the acceptance of one does not eliminate the others from further consideration. * Mutually exclusive projects : projects that compete with one another, so that the acceptance of one eliminates the others from further consideration. * Unlimited funds : the financial situation in which a firm is able to accept all independent projects that provide an acceptable return. * Capital rationing : the financial situation in which a firm has only fixed number of dollars for allocation between competing capital expenditures. * Accept reject approach : the evaluation of capital expenditure proposal to determine whether they meet the firm’s minimum acceptance criterion. * Ranking approach : the ranking of capital expenditure projects on the basis of some predetermined measure such as a required rate of return. * Conventional cash flow pattern : an initial outflow followed only by a series of inflows. * Non conventional cash flow pattern : a pattern in which an initial outflow is followed by a series of inflows and outflows. * Relevant cash flows : the incremental after-tax cash outflow (investment) and resulting subsequent inflows associated with a proposed capital expenditure. * Incremental cash flows : the additional cash flows – outflows and inflows – expected to result from a proposed

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