ShmoopTube

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And finance allah shmoop what is ah sinking fund oh

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that oil rig she's sinking we'll meet nessie lovely pink

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rig who has been working nicely for eight years now

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she pumps ten thousand barrels of oil from five thousand

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feet underwater without complaining a lick The experts believe that

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there are literally millions of barrels below where she drills

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and they know that sadly nessie won't be alive long

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enough to pump all of them out from you know

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below the ocean well she'll live twenty years and that's

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it then she'll kill over like your favorite dog one

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day and die and the company knows that they'll have

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to spend a billion dollars that day toe by nesi

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to the to z Well with that eventual sad day

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in mind mega glop corporation crown danish oyster which owns

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nessie has expected the billion dollar bill to come to

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them at that time And thus far each year for

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eight years they have socked away money in what is

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called a sinking fund and you know it took us

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a while to get there too so sorry so that

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twelve years from now when the billion dollar bill comes

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due it's not a big shock to the company They

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will already have saved their pennies Lots of them so

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that the billion box will be on hand Just sitting

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in their bank of america account our bank of wherever

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account ready teo Wire into riggs Are us to deliver

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a brand spanking new nessie too When nesic one has

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you know sucked her last oil So here's the mao

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A billion dollar bill is coming due in twenty years

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We have tons of advanced notice and sock away money

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to pay for it on a straight line basis while

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we sock away fifty million bucks a year They put

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it in a mattress in you know bank of america

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totally ready to go When you know her time comes

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in real life The company would have lots of other

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options Like buying the nessie too With leverage they could

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put a fraction of the total amount of purchase her

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down and maybe that's a third or less in total

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price Then they could borrow the remainder amount of money

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and buy the rig on credit Well they could also

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just lease it from the manufacturer but then leasing it

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Means that someone else owns nessie too and they maintain

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it There's a lot more risk in managing it and

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fixing it should nessie to ever need a trip to

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the shop And things can get ugly Yeah like that

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Okay Option three sinking fund buy with cash on hand

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Well so why would the company have struggled so much

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to put away fifty million year for two decades Well

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when it comes time to negotiate with vendors about buying

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a rig when the buyer is loaded and ready with

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ash well then it can command much better deal terms

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and probably a better price right it khun goto many

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ven doors of rigs and say i got cash You've

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got the rig A vendor who needs to borrow money

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from a bank first teo then pay another vendor And

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at worst it would have to you know borrow money

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from the vendor selling the rig and they charge a

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super high interest rate Ever buy a car Yeah You

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don't wanna have to borrow money from a car salesman

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Ever Well sinking funds essentially sink the liability of an

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eventual big fat harry bill that's coming D'oh Yeah different 00:03:11.968 --> [endTime] Bill what

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