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01:27 Dec 1, 2004
English to Chinese translations [PRO] Tech/Engineering - IT (Information Technology)
English term or phrase:you take the cash flows and discount them.
Suppose you were doing capital budgeting for a network security project. You'd say, "Here's the project. It will cost me this much today. I will either get some stream of revenue or some stream of cost savings over time. We're going to save X dollars a year because we won't have disruptions, viruses and so on. So if I spend this money today, the benefits are going to accrue over, say, 10 years." The way that risk comes in is that you don't know exactly what the benefit is going to be. You want a single number that picks up what you're going to spend today and the cash flows and savings that are going to come in over time. You want to reflect some things about those cash flows, in particular, when those savings are coming in. You also want to reflect how certain you are about what those benefits are going to be. That's where the risk comes in: "I'm positive it's going be $100 a year" versus "I think it might be $100, but it could be zero or $200," which is a riskier set of savings.
That happens in all capital budgets; you take the cash flows and discount them. There are two ways that cash flows are handicapped: One is they're handicapped by how far in the future they come; things that happen right away get a little handicap, things far away get a bigger handicap. The other handicap is how certain you are. If it's a sure thing, there's no handicap; the more uncertain you are, the bigger the handicap. That handicapping is where the risk comes in. Things that are riskier get a bigger handicap. Beta is a way of getting a number for the handicap.