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# Accounting Foundations: Making Business Decisions Using IRR and NPV

## Overview

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.

Business leaders eying risky investments have no more ability to peer into the future than the average family deciding on a home. They do, however, have time-tested strategiesÃ¢Â€Â”including the calculation and consideration of net present value (NPV) and internal rate of return (IRR)Ã¢Â€Â”to help them structure their long-term decisions. In this course, accounting and finance professors Jim and Kay Stice delve into these concepts, explaining how calculating NPV and IRR, as well as applying the foundations of the time value of money, can help businesses make smart decisions. Jim and Kay cover the importance of determining the amount, timing, and riskiness of future cash flows when deciding whether to undertake a long-term project. They also discuss how to construct a capital budgeting analysis, calculate NPV and IRR, assess opportunity costs, and more. Along the way, they provide lighthearted, practical examples that illuminate how each concept plays out in the real world.

## Syllabus

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

### Taught by

Jim Stice and Kay Stice

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