Accounting Foundations: Making Business Decisions Using IRR and NPV

Learn how to make long-term business decisions using net present value (NPV) and internal rate of return (IRR), including how to apply the foundations of the time value of money.

Introduction

• Making informed business decisions

1. Time Value of Money and Risk-Adjusted Interest Rates

• Understanding the time value of money
• Time value of money: Applying these ideas
• Overview of time value of money terms
• Computing the time value of money

2. Discounted Cash Flow Analysis

• Future cash flows and buying a car
• Basic idea: Cash flows, timing, and risk
• Risk and interest rates
• Forecasting cash flows
• Simple discounted cash flow valuation example

3. Capital Budgeting: NPV and IRR

• Introducing capital budgeting
• Capital budgeting overview
• The internal rate of return (IRR)
• Example: Buying a car in Hong Kong, changing forecasted cash flows
• Example: Buying a doughnut machine

4. Practice: Cash Flows by Item or by Year?

• Cash flows for Lily Company Machine
• Calculate NPV and IRR
• Spreadsheet analysis: Analyzing cash flows by item and year

5. Practice: Working Capital Plus Income Taxes

• The opportunity cost of cash under the mattress
• The time value cost of a working capital requirement
• Income taxes: After-tax cash flows from revenues and expenses
• Income taxes: The value of the depreciation tax shield
• Computing NPV and IRR with all the complexities
• Spreadsheet analysis: Sensitivity to changes in estimates

Conclusion

• Capital budgeting helps structure your thinking