- Okay, I have here a special little machine. - Okay, what does it do? - It creates money. - Money? How much money? - This little machine here creates exactly one US dollar per year, completely legal. The dollar pops out the hole at midnight on December 31st every year. - Now are you sure this is legal? - Absolutely. Now the question is, how much would you pay me to buy this dollar bill machine? - How long's it going to last? - That's the good news.
This little machine is guaranteed to last one billion years. Yes, in it's useful lifetime this machine will produce a total of one billion dollars. - A billion dollars? Wow. - So how much will you pay me for this machine? This billion dollar machine. Will you pay me a billion dollars for it? - No, I'm not going to pay you a billion. - Why not? You'll completely recover your billion dollar investment over the life of this machine. You pay me a billion dollars for it now and you'll get your billion dollars back.
- Yeah, but I'll have to wait a billion years. Plus a dollar now is worth a lot more than a dollar a billion years from now. - That's exactly right, you've hit on the key concept here. It is called the Time Value of Money. A dollar now is worth more than a dollar to be received five years from now, or 30 years from now, or a billion years from now. So when you are evaluating long-term projects, a process called Capital Budgeting, you have to consider the time value of money. - Okay, so what would be a fair price for this billion dollar machine? - Let's say that appropriate interest rate is 10 percent, is that okay? - Okay, fine, 10 percent.
- If the interest rate is 10 percent, then an appropriate price for this billion dollar machine is 10 dollars. - 10 dollars for a billion dollar machine? Obviously we all need to learn a little bit more about capital budgeting.
- Understanding financial statements
- Managing finances in the short term
- Analyzing risk and return
- Obtaining short-term and long-term financing
- Understanding the stock and bond markets
- Comparing the Facebook and Microsoft IPOs
- Working with financial institutions
- Using capital budgeting
- Creating simple personal saving and investment plans
Skill Level Intermediate
1. What Is Finance?
2. Understanding Financial Statements
3. Short-Term Financial Management
4. Risk and Return
5. Obtaining Long-Term Financing
6. Understanding Securities Markets
7. Financial Institutions
8. Capital Budgeting
Capital budgeting overview3m 20s
9. Bonus: Personal Financial Planning
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