Key Concepts in Business and Finance
Hypothesis Testing
Hypothesis testing is a type of statistical testing used to determine whether there is enough evidence in a sample of data to infer that a certain condition is true for the entire population. A hypothesis test examines two opposing hypotheses about a population: the null hypothesis and the alternative hypothesis. The null hypothesis is the statement being tested. Usually, the null hypothesis is a statement of “no effect” or “no difference.” The alternative hypothesis is the statement you want to be able to conclude is true.
Based on the sample data, the test determines whether to reject the null hypothesis. You use a p-value to make the determination. If the p-value is less than or equal to the level of significance, which is a cut-off point that you define, then you can reject the null hypothesis.
Cost-Benefit Analysis
Cost-benefit analysis is a means of evaluating all the potential costs and revenues that may be generated for any project. It helps to recognize if the project is feasible. Steps include: listing all the costs and benefits; determining the cost savings; creating a timeline for expected costs and revenue; and evaluating non-quantifiable benefits and costs.
Monetizing
Monetizing, in economic terms, means to convert any event, object, or transaction into a form of currency or something with transferable value. For example, over time, a company may develop any number of systems or assets that are part of the company’s overhead and infrastructure, supporting the company in selling its products or services. For example, an information system to track sales, monitor projects, or track personnel time.
Net Present Value
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. A positive net present value means a better return, and a negative net present value means a worse return.
Opportunity Cost
Opportunity cost is the cost of a foregone alternative, a benefit that a person could have received but gave up to take another course of action. For example, someone gives up going to see a movie to study for a test in order to get a good grade. It is the value of the best alternative that was not chosen in order to pursue the current endeavor.
Cash Accounting
Cash accounting involves receipts recorded during the period they are received, and expenses recorded in the period they are actually paid. Costs are the monetary value of expenditures for supplies, services, labor, products, equipment, and other items purchased for use by a business or other accounting entity.
Willingness to Pay
Willingness to pay (WTP) is the maximum amount an individual is willing to hand over to procure a product or service. The price of the transaction will thus be at a point somewhere between a buyer’s willingness to pay and a seller’s willingness to accept.
Social Discount Rate
Social discount rate (SDR) is used in computing the value of funds spent on social projects. The discount rate that is selected can have a profound impact on cost-benefit analysis, particularly when costs or benefits occur in the distant future. It reflects how much society is willing to invest in future damages. For example, consider two candy bars. One of them has a greater value in 50 years for someone else than the other for me, even though they taste the same.