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1. Identifying the Relevant Cash Flows ~ Project Cash Flow versus Accounting Income
The most important, but also the most difficult, step in capital budgeting is estimating projects’ cash flows—the investment outlays and the annual net cash flows after a project goes into operation. Many variables are involved, and many individuals and departments participate in the process. For example, the forecasts of unit sales and sales prices are normally made by the marketing group, based on their knowledge of price elasticity, advertising effects, the state of the economy, competitors’ reaction...

2. What are Bills of Exchange
Bills of exchange developed during the Middle Ages as a means of transferring funds and making payments over long distances without physically moving bulky quantities of precious metals. In the hands of thirteenth-century Italian merchants, bankers, and foreign exchange dealers, the bill of exchange evolved into a powerful financial tool, accommodating short-term credit transactions as well as facilitating foreign exchange transactions. The invention of the bill of exchange greatly facilitated foreign trade. The mechanics...

3. What is the Interest Rate
The interest rate can be regarded as the cost of money, expressed as a percentage. If the annual interest rate is 10 percent, an individual borrowing $100 for a year pays $10 interest. Decimalized currency systems substantially facilitated the calculation of interest. This is one reason countries rapidly adopted decimalized currency systems during the nineteenth century. Theoretically, interest rates adjust to a level at which the interest earned on $100 invested in financial assets (for example, corporate bonds) equals t...

4. What are Foreign Exchange Markets
Foreign exchange markets are markets in which national currencies are bought and sold with other national currencies. In a foreign exchange market U.S. dollars may purchase British pounds, German marks, French francs, Japanese yen, etc. Prices of foreign currency are expressed as exchange rates, the rate at which one currency can be converted into another currency. On 12 March 1997 it took $1.59 to purchase a British pound in foreign exchange markets, or, alternatively 0.6256 British pounds could purchase one U.S. dollar....

5. What is the Commodity Monetary Standard
Under a commodity monetary standard, a medium of exchange and unit of account is either a commodity or a claim to a commodity and the commodity is a good that would have value even if it were not used for money. Put differently, the commodity has an intrinsic value, in contrast to the paper money of an inconvertible paper standard that has value only by government fiat and is called fiat money for that reason. In the purest form of commodity money, the commodity itself may change hands. History furnishes numerous examples...

6. What is The Balance of Payments
The balance of payments for a country summarizes all the international transactions that involve either an outflow or an inflow of money. It is composed of three major elements: (1) the current account, (2) the capital account, and (3) the official reserves transactions account. The official reserves transactions account reflects the official transactions between central banks that must occur when the combined balance of the current and capital accounts is in either the deficit or surplus column. Transactions that lead to...

7. Short Introduction in Forced Savings
Forced savings refers to the use of money creation and inflation to divert resources into the production and acquisition of capital goods. A government that prints up money, as opposed to levying taxes or selling bonds, to pay for the construction of a hydroelectric generation facility is pursuing a policy of forced savings. Less-developed countries, particularly in Latin America, turned to forced savings policies in the post–World War II era as a means of financing economic development. At least some of the inflation in ...

8. What is the Value of Money
The value of money has to do with the purchasing power of a unit of money. One approach to the measurement of money value is to look at its precious metal equivalent. Under a gold standard, a dollar should be worth approximately a dollar’s worth of gold. Under a gold coin standard, the value of a dollar could drop below a dollar if the government reduces the gold content of its coinage relative to its face value. Under such circumstances it might be appropriate to say that a dollar is worth only 75 cents or 50 cents, based ...

9. What is the Velocity of Money
The velocity of money is the average number of times per year that a unit of currency (e.g., U.S. dollar, Japanese yen, German mark, etc.) is spent on goods and services. From a theoretical perspective a percentage change in the velocity of money can have the same impact on prices or other economic variables as an equivalent percentage change in the money supply. Sir William Petty (1623–1687) may have been the first writer on economics to describe the velocity of money. He advanced the plausible view that the velocity...