It is important to emphasize the distinction between stocks and flows. The balance in the cash (checking) account measures the stock of cash. The flow may be an inflow or outflow. If the inflow exceeds the outflow, the stock will rise (and vice vera). The stock is measured at a point in time such as that reflected on a balance sheet. A flow must be measured as a rate per period of time-such as income per year (for example, the income statement) or cash inflow per month. Both stocks and flows of this sort are of prime interest to lender and financial manager because the absolute amount of cash as well as rate at which it flows through the business as a result of operations determines to a large extent the ability of the firm to pay bills, to take on new capital projects, to pay dividends, and to make a host of other financial decisions.
What can be done to minimize the level of accounts receivable without adjusting the terms of sale or using methods that might reduce sales? (200 Words)
“One way to understand the preference of NPV over IRR, more generally, is to recognize that NPV uses the “correct rate, i.e., the cost of capital, to discount the cash flows, rather than an “arbitrary” rate, i.e., the IRR, that makes NPV =0.”
What are the main factors considered in deciding if a proposed capital investment is attractive to the company? (200 words)
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