Glossary: M05 — Capital Investments
| Term | Definition |
|---|
| Capital allocation | Process of making capital investment and return decisions |
| Going concern projects | Investments to maintain current operations |
| Regulatory/compliance projects | Investments required by law or regulation |
| Expansion projects | Investments to increase business size |
| Sunk cost | Cost already incurred; should not affect investment decisions |
| Opportunity cost | Value of the next best alternative foregone |
| Incremental cash flow | Cash flow change attributable to the investment decision |
| Externality | Effect of an investment on other parts of the company |
| Cannibalization | New investment takes sales from existing products |
| Conventional cash flow | Cash flow pattern with only one sign change |
| Non-conventional cash flow | Cash flow with multiple sign changes; may produce multiple IRRs |
| NPV | Net Present Value — sum of PV of all incremental cash flows |
| IRR | Internal Rate of Return — discount rate that makes NPV = 0 |
| ROIC | Return on Invested Capital |
| Independent projects | Projects whose cash flows are unrelated |
| Mutually exclusive projects | Projects where accepting one means rejecting others |
| Real option | Right but not obligation to make a future business decision |
| Timing option | Option to delay an investment |
| Sizing option | Option to expand or abandon a project |
| Flexibility option | Option to change inputs, outputs, or processes |