Finance chap 7 terms

Capital Investment Decision

decision involving a high-dollar investment expected to achieve long-term benefits for an organization

Strategic Decision

a capital investment decision designed to increase a health care organization's strategic (long-term) position

Expansion Decision

a capital investment decision designed to increase a health care organization's operational capacity

Replacement Decision

a capital investment decision designed to replace older assets with newer (often cost-saving) ones

Retained Earnings

portion of profits an organization keeps for growth and to support its mission

Capital Appreciation

a gain that occurs when an asset is worth more when sold than when purchased. ex: land, property, stocks

Payback Method

a method to evaluate the feasibility of an investment by determining how long it would take to recover the initial investment, disregarding the time value of money.

Net Present Value

the difference between the initial amount paid for an investment and the future cash inflows the investment brings in, adjusted for the cost of capital.

Discounted Cash Flows

cash flows adjusted to account for the cost of capital

Cost of Capital

the rate of return required to undertake a project, the cost of capital accounts for both the time value of money and risk.

Salvage Value

The amount of cash to be received when an asset is sold, usually at the end of its useful life. (also called terminal value, residual value, or scrap value)

Goodwill

The value of intangible factors such as brand reputation, customer or supplier relationships, employee competencies, and the like that are expected to affect an entity's future earning power. An acquiring entity may pay cash and assume liabilities in exce

Internal Rate of Return

The rate of return on an investment that makes the net present value equal to $0, after all cash flows have been discounted at the same rate. It is also the discount rate at which the discounted cash flows over the life of the project exactly equal the in

Required Rate of Return

The minimal internal rate of return on any investment that will justify that investment.

Straight-Line Depreciation

A depreciation method that depreciates an asset an equal amount each year until it reaches its salvage value at the end of its useful life.

Sunk Cost

Costs incurred in the past.

Opportunity Cost

Proceeds lost by forgoing or delaying opportunities other than the opportunity chosen.

Incremental Cash Flows

Cash flows that occur solely as a result of a particular action, such as undertaking a project.

Cannibalization

What occurs when a new service or product decreases the revenues from other services or product lines; this result is considered a cash outflow.

Operating Cash Flows

Cash flows that occur on a regular basis, often following implementation of a project. (also called regular cash flows)

Non-regular Cash Flows

Cash flows that occur sporadically or on an irregular basis. A common non-regular cash flow is salvage value, the receipt of funds following a one-time sale of an asset at the end of its useful life.