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Better Decision Making Presented By: Anu Mishra M.B.A 3rd Sem B.U
Financial Decision-Making• Performing a Cost/Benefit Analysis is essential to sound financial decision-making• A critical part of a Cost Benefit Analysis is determining the value of money over time
Time Value of Money• Money’s value changes over time• A dollar today is worth more than a dollar tomorrow• When time value is considered, the cost- effectiveness of a project can change
Today’s dollar is worth more because:• Interest rates $100 you invest at a 4% interest rate today will be worth $104 in 1 year, thus making today’s money worth more• Inflation You purchase 20 items today at $1.00 each for $20.00 After one year, due to inflation, those same items cost $1.50 each and you can only purchase 13.33 of that same item with our $20.00. Thus, today’s money is worth more.
Value of Money Over Time Future ValueMeasures what today’s money would be worth at a specified time in the future assuming a certain discount rate Present ValueMeasures what money at a specified period of time in the future would be worth if valued in terms of today’s money
Why Better Decision Making is Necessary ?• Uncertainty - Many facts may not be known.• Complexity - You have to consider many interrelated factors.• High-risk consequences - The impact of the decision may be significant.• Alternatives - Each has its own set of uncertainties and consequences.• Interpersonal issues - It can be difficult to predict how other people will react.
Discount Rate• The rate used in calculating the present value of expected yearly benefits and costs• Used to reflect the time value of money• The higher the discount rate, the lower the present value of future cash flows
A Systematic Approach to Decision MakingThere are six steps to making an effective decision:• Create a constructive environment.• Generate good alternatives.• Explore these alternatives.• Choose the best alternative.• Check your decision.• Communicate your decision, and take action.