From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
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Basic idea: Cash flows, timing, and risk
From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
Basic idea: Cash flows, timing, and risk
- Many business decisions involve determining whether to spend cash now in the expectation of receiving cash in the future, sometimes far into the future. Examples are spending money to expand a production facility, or buying a new piece of equipment, or establishing a development team to create new products, or signing a professional athlete to a long-term contract. In evaluating this trade off between spending cash now in the expectation of receiving cash in the future, it is important to determine the amount, the timing and the riskiness of the future cash flows. To illustrate this importance, let's consider the example of estimating the value of a business. Investing in a business is a perfect example of spending cash now in the expectation of receiving back more cash in the future. Let's suppose that a friend has asked me to become a partner in an online retail business by investing $100,000 of my hard earned cash into the…
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