# Glossary

- Capital asset pricing model
- The capital asset pricing model (CAPM) is a model for determining the expected return on an individual share.
- Discounting
- Finding a present value from a future value is known as discounting. Discounting is the practice of adjusting future cash flows to take into account the time value of money. The result of discounting is the present value of a future cash flow, and allows cashflows at different points of time in the future to be compared on a like for like basis.
- Discount rate
- The discount rate is the rate applied to future cash flows to derive the present value of those cash flows. It is often determined by the organisation’s weighed average cost of capital. In banking, the interest rate at which member banks of a national clearing system may borrow short term funds directly from the central bank.
- Externalities
- The costs or benefits that fall on the public not just on the private persons involved in the transaction or activity.
- Net present value
- A net present value (NPV) is the current (today’s) value of a stream of future cash flows. The NPV is derived by discounted cash flow (DCF) analysis. If the calculation gives a positive result, then the project is suitable since, by definition, it will increase the net present value of the business.
- Opportunity cost
- A key concept in economics, an opportunity cost is the cost related to the second best choice available to someone who has chosen from several mutually exclusive options. Thus it is a measure of what has been foregone by a particular course of action and expresses the basic relationship between scarcity and choice. Opportunity costs are not restricted to monetary or financial costs: the real cost of output foregone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs. An opportunity cost is cash inflow which would have been received, but which will not be received if a project under consideration goes ahead. For example the opportunity cost of discontinuing manufacturing product B to focus solely on product A is the sales of product B which would have been made if both were manufactured. Like sunk costs, people also have a tendency to ignore opportunity costs. The concept is now widely applied beyond financial contexts, for example one opportunity cost of studying this course is the alternative use of the time that is spent studying.
- PESTEL
- PESTEL is an extension of PEST analysis. The letters stand for the following factors; Political/legal, (macro)Economic; Social, Technological, Environmental and Legal. It is a way of grouping the major environmental factors impacting on a organisation in order to anaylse their effects.
- Present value
- The present value of a sum is the amount that would have to be received now to be worth the same as an amount received in the future. Future flows are converted to their present value by discounting using a discount factor. The present value of a project is calculated by discounting each relevant future cash flow in order to arrive at its present day value. Then the total of all positive and negative discounted future cashflows is calculated to get a net positive or negative discounted cash flow.
- Relevant cash flows
- A relevant cash flow is a cost or revenue which can be changed depending on the outcome of a decision. A cash flow which will not be changed by a decision is not a relevant cash flow to that decision.
- Risk
- A measure of uncertainty. Risk occurs when there is more than one possible outcome and it is possible to assign probabilities to these possible outcomes.
- Sunk cost
- Sunk costs are costs which have already been incurred, or committed to be incurred, and cannot be recovered and which now have no relevance to financial decision making. An example is capital expenditure on plant and equipment.
- SWOT
- SWOT stands for
**S**trengths,**W**eaknesses,**O**pportunities and**T**hreats. A technique for developing business strategy by identifying opportunities to be exploited and threats to be safeguarded against, having regard to the organisation’s strengths and weakness (i.e. capabilities). - Time value of money
- The time value of money is the concept that if cash flows are paid or received in the future they are less valuable than if paid or received immediately. This is reflected in the discount rate used in financial analysis of present value. Taking account of the time value of money converts future cash flows into their present value by discounting them.
- Uncertainty
- There is uncertainty when a number of different outcomes are possible, but it is not possible to assign probabilities to these outcomes. Three quantitative approaches to uncertainty: the Maximax, Maximin and Minimax Regret decision-making rules are discussed.
- Weighted average cost of capital
- The weighted average of the cost of capital (WACC) is the weighted average of the cost of debt and the cost of equity for an organisation, where the weights are the market proportions of debt and equity in the organisation's capital structure
- Working capital
- The working capital of a business is its current assets and current liabilities. Current assets less current liabilities is called net working capital. Working capital comprises the resources organisations have at their disposal as a result of the day-to-day running of their business. It comprises cash held at the bank, the value of the holdings of stock (also known as ‘inventory’) plus the cash due to be received from customers (‘trade receivables’ or, simply, ‘receivables’) less the cash due to be paid to suppliers (‘trade payables’ or, simply, ‘payables’); often referred to as net current assets.