Skip to main content

Key Terms

  • Capital Budgeting: Process of evaluating long-term investments
  • Payback Period: Time to recover initial investment
  • Discounted Payback: Payback considering time value of money
  • Accounting Rate of Return (ARR): Average accounting profit ÷ investment
  • Time Value of Money (TVM): Concept that money today is worth more than future money
  • Net Present Value (NPV): Present value of cash flows minus initial investment
  • Internal Rate of Return (IRR): Discount rate that makes NPV = 0
  • Profitability Index (PI): PV of inflows ÷ Initial investment
  • Discount Rate: Required rate of return, often WACC
  • Depreciation Tax Shield: Tax savings from depreciation
  • Working Capital: Current assets minus current liabilities
  • Terminal Cash Flow: Final cash inflow at project end
  • Sensitivity Analysis: Vary assumptions to see impact on NPV/IRR
  • Scenario Analysis: Evaluate different cases (best, base, worst)
  • Cost of Capital: Required return from investors and lenders
  • State Aid: Government grants or subsidies for investments