Chapter 5
Capital budgeting → analyzing alternative investment options and selecting the options to
be implemented
Replacement investments → preserve production capacity
Expansion investments → increase production capacity
Investment project → the sum of all related investments in fixed and current assets
Free cash flow → the difference between cash inflows generated by sales and cash outflows
related to purchasing and using resources in a particular period (all other pays are
completed) → only related to operational activities in contrast to normal cash flow
Time value of money → the difference in value between two equal amounts received at
different moments in time
Opportunity costs → missing out on this revenue due to an amount being received later
Weighted average cost of capital → the average cost against which a company can attract
capital →If an investment is equal to the weighted average cost of capital, the cash flow
that exactly meets the requirements of the capital providers
Period profit → calculated by the difference between sales revenue and costs of that period
Depreciation makes difference between period profit and free cash flow because of
depreciation
Disinvestments → residual value of the fixed assets
Free cash flows = period profit after tax + depreciations – investments + disinvestments
Marginal tax rate → the tax rate paid on additional project profit in addition to profit
incurred from existing activities
Leasing → hiring fixed assets can be an alternative to buying
- Financial lease → long term rental agreement that cannot be canceled
Risk is for the user of the asset (economic ownership)
- Operational lease → rental agreement that can be canceled at short notice
Risk and maintenance cost for leasing agency (not mentioned on the balance sheet)
(lessee is business and lessor is giver)
Capital budgeting → analyzing alternative investment options and selecting the options to
be implemented
Replacement investments → preserve production capacity
Expansion investments → increase production capacity
Investment project → the sum of all related investments in fixed and current assets
Free cash flow → the difference between cash inflows generated by sales and cash outflows
related to purchasing and using resources in a particular period (all other pays are
completed) → only related to operational activities in contrast to normal cash flow
Time value of money → the difference in value between two equal amounts received at
different moments in time
Opportunity costs → missing out on this revenue due to an amount being received later
Weighted average cost of capital → the average cost against which a company can attract
capital →If an investment is equal to the weighted average cost of capital, the cash flow
that exactly meets the requirements of the capital providers
Period profit → calculated by the difference between sales revenue and costs of that period
Depreciation makes difference between period profit and free cash flow because of
depreciation
Disinvestments → residual value of the fixed assets
Free cash flows = period profit after tax + depreciations – investments + disinvestments
Marginal tax rate → the tax rate paid on additional project profit in addition to profit
incurred from existing activities
Leasing → hiring fixed assets can be an alternative to buying
- Financial lease → long term rental agreement that cannot be canceled
Risk is for the user of the asset (economic ownership)
- Operational lease → rental agreement that can be canceled at short notice
Risk and maintenance cost for leasing agency (not mentioned on the balance sheet)
(lessee is business and lessor is giver)
