Fundamentals of Corporate Finance,
Chapter 8
capital rationing - ANS - limit set on the amount of funds available for investment
\comparing assets rule - ANS - rule which instructs to, when given a choice between real assets
which differ in cost and working value, choose the machine/asset with the lowest equivalent
annual annuity
\discounted payback period - ANS - the number of periods before the present value of the
prospective cash flows equals or exceeds the initial investment (How long must the project last
in order to offer a positive net present value?)
\equivalent annual annuity - ANS - the cash flow per period with the same present value as the
cost of buying and operating a machine
=pv of costs/ x-year annuity factor
\hard rationing - ANS - capital rationing that is imposed by investors, and truly limits the firm to
the amount of funding it can receive/use
\internal rate of return - ANS - discount rate at which a projects net present value equals zero
\investment timing decision - ANS - when should you invest and when should you wait to invest
later
\investment timing decision rule - ANS - rule which instructs to choose the investment date that
produces the highest present value today
\net present value - ANS - present value of cash flows minus investment
\NPV Rule - ANS - rule which state that you should invest in any project that has a positive NPV
when its cash flows are discounted at the opportunity cost of capital
\opportunity cost of capital - ANS - expected rate of return given up by investing in a project
\payback period - ANS - time until cash flows recover the initial investment
\payback rule - ANS - a project should be accepted if its payback period is less than a specified
cutoff period
\profitability index - ANS - ratio of net present value to initial investment
\Rate of return rule - ANS - rule which states that you should invest in any project offering a rate
of return that is higher than the opportunity cost of capital
\replacement timing decision - ANS - deciding when to replace an old machine
\soft rationing - ANS - capital rationing that is not imposed by investors, but rather by top
management
\
Chapter 8
capital rationing - ANS - limit set on the amount of funds available for investment
\comparing assets rule - ANS - rule which instructs to, when given a choice between real assets
which differ in cost and working value, choose the machine/asset with the lowest equivalent
annual annuity
\discounted payback period - ANS - the number of periods before the present value of the
prospective cash flows equals or exceeds the initial investment (How long must the project last
in order to offer a positive net present value?)
\equivalent annual annuity - ANS - the cash flow per period with the same present value as the
cost of buying and operating a machine
=pv of costs/ x-year annuity factor
\hard rationing - ANS - capital rationing that is imposed by investors, and truly limits the firm to
the amount of funding it can receive/use
\internal rate of return - ANS - discount rate at which a projects net present value equals zero
\investment timing decision - ANS - when should you invest and when should you wait to invest
later
\investment timing decision rule - ANS - rule which instructs to choose the investment date that
produces the highest present value today
\net present value - ANS - present value of cash flows minus investment
\NPV Rule - ANS - rule which state that you should invest in any project that has a positive NPV
when its cash flows are discounted at the opportunity cost of capital
\opportunity cost of capital - ANS - expected rate of return given up by investing in a project
\payback period - ANS - time until cash flows recover the initial investment
\payback rule - ANS - a project should be accepted if its payback period is less than a specified
cutoff period
\profitability index - ANS - ratio of net present value to initial investment
\Rate of return rule - ANS - rule which states that you should invest in any project offering a rate
of return that is higher than the opportunity cost of capital
\replacement timing decision - ANS - deciding when to replace an old machine
\soft rationing - ANS - capital rationing that is not imposed by investors, but rather by top
management
\
