How do you decide whether to pursue a project or buy a piece of production machinery? You do a cost-benefit analysis. You look at the costs incurred and the revenues that will be created. If the revenues are greater than the costs then you should go ahead.
Or should you?
Let’s consider the purchase of a machine to make a new product. Would you count the revenues that are produced from the product in 3 years’ time as being worth the same as revenues this year? Probably not – because if you had the money this year, you could invest it. Furthermore, there is a greater risk attached to the revenues forecast for Year 3.
So how do I convert the future revenues into their value today?
That’s what this video is about.
The spreadsheet file below has 4 tabs: