Let’s imagine that you decide to start up your own ice cream shop business. You will need to invest in equipment, food supplies and property. All the money that you invest to start your business is called capital.
Essentially, the capital of a business consists of all of its assets (or items to assist in the creation of wealth). What if it dawns on you that you don’t have enough cash to buy all the needed assets? Let’s see how new businesses and companies deal with this problem. Continue reading…
In the ECF approach, there is an 80 percent probability of receiving $10,000, but a 20 percent probability of receiving only $8,000 in the first year. In the second year, the probability of getting $10,000 is down to 70 percent and the probability of receiving only $7,000 is 30 percent. The TCF approach treats the cash flows as contractual but discounts them at 8 percent, which includes the risk-free rate and a premium for the uncertainty of collecting the cash.The ECF approach incorporates the uncertainty when assessing the probability of collection, so it discounts the cash flows at the risk-free rate of 5 percent. Continue reading…
