Alternative Decisions in Financial Management
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Alternative Decisions in Financial Management
- 1. Financial Management ALTERNATIVE DECISIONS in
- 2. When you have a choice between two or more alternatives and you have to select one, you are making a decision
- 5. Five-Step Decision Process Gather Information Make Predictions Choose an Alternative Implement the Decision Evaluate Performance Step 1. Step 2. Step 3. Step 4. Step 5. Historical Costs Other Information Specific Predictions Feedback
- 17. OR BUY MAKE
- 34. I N V E S T OR NOT TO INVEST
- 39. Renting vs. Buying
Editor's Notes
- If there is no choice, you will have to simply follow or obey. So a decision implies a selection, a choice, a verdict or a nod. In everyday life, decisions are made. A personal decision affects an individual but organizational decisions cause a change, good or bad, to a lot many people known as stakeholders. So decision making in an organization must be systematic and not off the cuff. A good executive must be good at decision making.
- It may be noted that every decision involves a certain degree of risk. Very few decisions are made with absolute certainty. So a good decision would be to choose a solution with the highest probability of success and in accordance with the goals, desires, lifestyle and values etc.
- Decision model. This is a simplified version of the problem. No irrelevant information, only factors relevant to the problem are highlighted. It brings together all elements of a problem like the criteria, the constraints, and the alternative. Financial data. But they also maintain records of physical units produced and quantities of raw material consumed, labor hours used. Management accountants also asses qualitative factors such as employee morale, customers satisfaction, image of the company in the eyes of the public.
- The benefits must be more than the cost except in social projects where benefits may be equal to cost. Benefits can be in the form of cash return, perks, advantages, customer’s satisfaction or reputation of a company. While cost means value, worth or sacrifice made. Only relevant cost and relevant revenues should be considered in making decisions
- In order to qualify for relevancy, a cost must meet two criteria: (i) They affect the future and (ii) they differ among alternatives.
- 1. Irrelevant cost example: a plot of land can be used for a shopping mall or entertainment park. The plot is irrelevant since it would be used in both the cases.
- Whenever an organization is deciding to go for a particular project, it should not ignore opportunities for other projects. It should consider (i) what alternative opportunities are there? (2) Which is the best of these alternative opportunities?
- A cost which is identical in all decisions is irrelevant.
- EXAMPLE: CEBU STEEL CORPORATION MORE 4 YRS ALREADY BUYING STEEL BARS IN CHINA. STOPPED PRODUCTION, AUCTION THE PLANT MACHINERIES AND EQUIPMENT. REASON WAS SUPER EXPENSIVE SUPER HIG COST OF RAW MATERIALS BECAUSE BILLETS ARE STILL IMPORTED FROM RUSSIA, ALSO LABOR AND OVERHEAD. NO MORE PRODUCTION.
- The book value of existing equipment is irrelevant since it is neither a future cost nor does it differ among any alternatives (sunk costs never differ). The disposal price of old equipment and the purchase cost of new equipment are relevant costs and revenues because... they are future costs or revenues that differ between alternatives to be decided upon. ALSO GIVE EXAMPLE TO JUNREX INVESTING NEW SYSTEM
- You do not have other costs associated with owning a home, such as property taxes or homeowner’s insurance. Renter’s insurance can be obtained from the same companies as homeowner’s insurance. Renter’s insurance is generally cheaper than homeowner’s insurance.
- Can you think of any other benefits of renting? Now let’s look at the advantages and disadvantages of owning a home.
- 1. You can build equity. Equity refers to the value of the home minus the debt you owe on it. As you pay down the loan and your home value increases, you build up equity. 2. One of the benefits of equity is that you can borrow against it for many purposes, usually at a relatively low interest rate. But, remember you could lose your home if you don’t pay back the loan. 3. Homes have traditionally increased in value over time; so many people consider a home to be an investment. 4. Home ownership may reduce the amount of income tax you owe, since mortgage interest and property taxes are deductible.
- Can you think of any disadvantages of owning your home? Answers may include: if you have to move around frequently, or if you can’t afford to fix it when something goes wrong. Accept all reasonable student answers. How much can you afford?