Name Description

The activity of establishing cash flow (dollars in and out of the project) by month and the
accumulated total cash flow for the project for the measurement of actual versus the
Cash Flow Analysis
budget costs. This is necessary to allow for funding of the project at the lowest carrying
charges and is a method of measuring project progress.
The process of determining whether or not projects such as building a new plant or
investing in a long-term venture are worthwhile. Also known as "investment appraisal".
Popular methods of capital budgeting include net present value (NPV), internal rate of
Capital Budgeting return (IRR), discounted cash flow (DCF) and payback period.
A company's proportion of short and long-term debt is considered when analyzing capital
structure. When people refer to capital structure they are most likely referring to a firm's
debt-to-equity ratio, which provides insight into how risky a company is. Usually a
company more heavily financed by debt poses greater risk, as this firm is relatively highly
Capital Structure levered.

The planning of project expenditures relative to income in such a way as to minimize the
carrying cost of the financing for the project. This maybe achieved by delaying some of
Cash Flow
the major activities, but only at the risk of late completion and consequent increased cost.
Management
An analysis of the relationship between the costs of undertaking a task or project, initial
and recurrent, and the benefits likely to arise from the changed situation, initially and
recurrently. Note: The hard tangible, readily measurable benefits may sometimes be
accompanied by soft benefits which may be real but difficult to isolate, measure and
value. The analysis allows comparison of the returns from alternative forms of
investment. The analysis of the potential costs and benefits of a project which allows
Cost Benefit Analysis comparison of the returns from alternative forms of investment.
The required return necessary to make a capital budgeting project - such as building a
new factory - worthwhile. Cost of capital would include the cost of debt and the cost of
equity. The cost of capital determines how a company can raise money (through a stock
issue, borrowing, or a mix of the two). This is the rate of return that a firm would receive if
Cost of Capital it invested its money someplace else with similar risk.
The effective rate that a company pays on its current debt. This can be measured in
either before- or after-tax returns; however, because interest expense is deductible, the
after-tax cost is seen most often. This is one part of the company's capital structure,
which also includes the cost of equity. A company will use various bonds, loans and other
forms of debt, so this measure is useful for giving an idea as to the overall rate being paid
by the company to use debt financing. The measure can also give investors an idea as to
the riskiness of the company compared to others, because riskier companies generally
have a higher cost of debt. To get the after-tax rate, you simply multiply the before-tax
rate by one minus the marginal tax rate (before-tax rate x (1-marginal tax)). If a
company's only debt were a single bond in which it paid 5%, the before-tax cost of debt
would simply be 5%. If, however, the company's marginal tax rate were 40%, the
Cost of Debt In financial after-tax
company's theory, the return
cost thatwould
of debt stockholders require
be only 3% (5% for a company. The traditional
x (1-40%)).
formula is the dividend capitalization model: (see picture) A firm's cost of equity
represents the compensation that the market demands in exchange for owning the asset
and bearing the risk of ownership. Let's look at a very simple example: let's say you
require a rate of return of 10% on an investment in TSJ Sports. The stock is currently
trading at $10 and will pay a dividend of $0.30. Through a combination of dividends and
share appreciation you require a $1.00 return on your $10.00 investment. Therefore the
stock will have to appreciate by $0.70, which, combined with the $0.30 from dividends,
gives you your 10% cost of equity. The capital asset pricing model (CAPM) is another
Cost of Equity method used to determine cost of equity.
The ratio of BCWP to ACWP. A positive value (i.e. greater than 1) indicates that costs are
running under budget. A negative value (i.e. less than 1) indicates that costs are running
Cost Performance over budget i.e. CPI = BCWP / ACWP ; BCWP= Budgeted cost of work performed; ACWP =
Indicator ("CPI") Actual cost of work performed
A type of contract where the buyer reimburses the seller for the seller's allowable costs
plus a fixed fee. A form of contractual arrangement in which the customer agrees to
Cost Plus Fixed Fee reimburse the contractor's actual costs, regardless of amount, and in addition pay a
Contract ("CPFF") negotiated fee independent of the amount of the actual costs.
A type of Contract where the buyer reimburses the seller for the seller's allowable costs
and the seller earns a profit if defined criteria are met. A form of contractual arrangement
Cost Plus Incentive similar to CPFF except that the fee is not preset or fixed but rather depends on some
Fee Contract ("CPIFC") specified result, such as timely delivery.
Cost Plus Percentage
Provides reimbursement of allowable cost of services performed plus an agreed upon
of Cost Contract
percentage of the estimated cost as profit.
("CPPC")
The decrease in value of tangible property (without loss of property) due to causes such
as wear, tear, age, and obsolescence.A charge to current operations which distributes the
cost
A of a tangible
measure capital asset,
of a company's less leverage
financial estimatedcalculated
residual value, over the
by dividing estimated
its total useful
liabilities by
life of the asset
stockholders' in a systematic
equity. It indicatesand logical
what manner.
proportion It doesand
of equity not debt
involve
theacompany
process of is using
Depreciation valuation.
to finance its assets. Note: Sometimes only interest-bearing, long-term debt is used
instead of total liabilities in the calculation. A high debt/equity ratio generally means that
a company has been aggressive in financing its growth with debt. This can result in
volatile earnings as a result of the additional interest expense. If a lot of debt is used to
finance increased operations (high debt to equity), the company could potentially
generate more earnings than it would have without this outside financing. If this were to
increase earnings by a greater amount than the debt cost (interest), then the
shareholders benefit as more earnings are being spread among the same amount of
shareholders. However, the cost of this debt financing may outweigh the return that the
company generates on the debt through investment and business activities and become
too much for the company to handle. This can lead to bankruptcy, which would leave
shareholders with nothing. The debt/equity ratio also depends on the industry in which
the company operates. For example, capital-intensive industries such as auto
The rate of interest which is used to discount to their present-day value earnings arising
manufacturing tend to have a debt/equity ratio above 2, while personal computer
in the future. With positive interest rates, a sum of money which is invested will increase
Dept/Equity Ratio companies have a debt/equity of under 0.5.
in value over time and hence the present value of money is less than its value in the
future. The size of the discount rate will affect the appraised viability of those projects to
which it is applied. Broadly, the higher the discount rate the lower will be the present
value of earnings (or benefits) arising in the future and the greater the negative impacts
on project feasibility. The discount rate is determined pragmatically by the sponsor.
Ideally it should take account of the sponsor's cost of capital, the rate of inflation, interest
rates and rates of return on investments throughout the economy. Note: There is a
difference between "real" discount rates and "nominal" discount rates. Real discount rates
are used in conjunction with cash flows which are expressed in terms of present-day
money values, with no allowance for price inflation. (The cash flows should, however,
allow for increments in future over and above price inflation, e.g. real wage increases.)
Nominal discount rates, on the other hand, are higher than real discount rates and are
applied to cash flows which make specific allowance for future price inflation at an
Discount Rate estimated rate
A calculation of present value of a projected cash flow based on some assumed rate of
inflation or interest. A method for comparing the relative merits of project investments
taking into account the value of money, taxation, varying operating costs, earlier cash
returns for reinvestment etc. Also known as Internal Rate of Return. Although theoretically
Discounted Cash Flow not as sound as Net Present Value, it is easier to present and relate to interest rates on
("DCF") borrowed money. Neither DCF nor NPV takes into account project risks
The process of establishing the value of a project in relation to other corporate
Economic Evaluation standards/bench marks, project profitability, financing, interest rates and acceptance.
Economic Value The reasonable economic value expected to be added to an enterprise or one of its
Added ongoing processes as a result of the project.
Financial Viability The extent to which a program or project can be justified or sustained financially
The minimum amount of return that a person requires before they will make an
Hurdle Rate investment in something.
The return which can be earned on the capital invested in the project, i.e. the discount
rate which gives an NPV of zero. This is equivalent to the yield on the investment. Simple
Internal Rate of calculation of annual financial return for a given outlay without consideration of any
Return ("IRR") external or related factors.
Amounts owed under obligations for goods and services received and other assets
acquired; includes accruals of amounts earned but not yet due and progress payments
Liabilities due on contracts.
The difference between the discounted present value of benefits and the discounted
present value of costs. When a Rate of Return is applied to the stream of annual cash
flows resulting from a project investment, it is possible to calculate whether the
discounted value is greater than the cost of the investment. In times of high interest and
inflation especially, the method gives more accurate results than simple pay back periods
and average return. The difference between the present value of the cash flows
Net Present Value generated by a project and its capital cost. It is calculated as part of the process of
("NPV") assessing and appraising investments.
 A cost accounting system that accumulates actual costs for projects in such a way that
total costs for all work in an organization can be allocated to the appropriate projects,
Project Cost normally providing monthly cost summaries; also used in cost planning to summarize the
Accounting System detailed task cost estimates.
The process of placing responsibility on the designers and implementers to perform within
their previously established budgets. Project costs are then collected and reported in a
way that Actuals to Budget can be compared, and sound management and technical
decisions can be made on the Project. Two simple but essential principles of the process
must be clearly understood: 1. there must be a basis for comparison, and 2. only future
costs can be controlled. A subset of project management that includes resource
Project Cost planning, cost estimating, cost control and cost budgeting in an effort to complete the
Management project within its approved budget
The establishment of a project cost accounting system of ledgers, asset records,
liabilities, write-offs, taxes, depreciation expense, raw materials, pre-paid expenses,
Project Cost Systems salaries
A control gate at which the provider executive management reviews, approves, and
commits the company to the provider's project plan and approves the project start. The
PIR is the forum for executive management to constructively challenge the readiness of
Project Initiation the provider project manager and project team to initiate the project effort and
Review successfully meet the project requirements.
Analysis of the consequences and probabilities that certain undesirable events will occur
Project Risk Analysis and their impact on attaining the contract/procurement objectives.
A comprehensive framework within which risks can be managed effectively and financial
values placed upon them. RAMP aims to achieve as much certainty as possible about a
long term and uncertain future. In the case of a new project, the RAMP process covers the
Risk Analysis and project's entire lifecycle, from initial conception to eventual termination. The process
Management for facilitates risk mitigation and provides a system for the control of the remaining risks.
Projects ("RAMP") Editor's Note: Be aware of the RAMP definition of "Project" and the extent of its life span

The act of revising the project's scope, budget, schedule or quality, preferably without
Risk Mitigation material impact on the project's objectives, in order to reduce uncertainty on the project.
Risk Quantification Process of applying values to the various aspects of a risk
Those products, functionality, benefits, etc. resulting from the project that stakeholders
look forward to with some degree of certainty, rightly or wrongly. Discrepancies between
stakeholder needs, specified requirements, expectations and actual results can be a
Stakeholder significant source of dissatisfaction with final project results. Hence the importance of
Expectations good stakeholder communication throughout the project.
The preparation of a cost estimate by using judgment and experience to arrive at an
Top Down Cost overall total amount, usually done by an experienced estimator or manager making a
Estimating subjective comparison of the project with similar previous projects
The time value of money is the premise that an investor prefers to receive a payment of a
fixed amount of money today, rather than an equal amount in the future, all else being
Time Value of Money equal.
Broadly speaking, a company’s assets are financed by either debt or equity. WACC is the
Weighted Average
average of the costs of these sources of financing, each of which is weighted by its
Cost of Capital
respective use in the given situation. By taking a weighted average, we can see how
(WACC)
much interest the company has to pay for every dollar it finances.
Debt-Service
In corporate finance, it is the amount of cash flow available to meet annual interest and
Coverage Ratio
principal payments on debt, including sinking fund payments.
(DSCR)
Funds used by a company to acquire or upgrade physical assets such as property,
Capital Expenditure industrial buildings or equipment. This type of outlay is made by companies to maintain or
(CAPEX) increase the scope of their operation. These expenditures can include everything from
repairing a roof to building a brand new factory.
Operating Expense
The essential things that a company must pay for in order to maintain business.
(OPEX)
Equations
Memorandum of Agreement ("MOA")

Memorandum of Understanding
("MOU")
 A document that describes the background, assumptions, and
agreements between two parties. In a contractual agreement, the
buyer and seller often create a MOA at the conclusion of contract
negotiations.
Any written agreement-in-principle describing how a commitment will
be administered. A document that describes an agreement for
cooperative effort between two separate organizations