Financial Decision Making for Managers

Question 1

            An opportunity cost is described to an alternative cost that has been given up in the quest of pursuing a specific conduct (Mankiw, 2012).  This cost can thus be evaluated in terms of utility or in monetary form.  The opportunity cost theory acts as a significant function in scarce resources allocation.  In the context of analyzing cost opportunity cost is seen as the flow of cash that can be provided by the corporation’s assets. Trade off must be in existence in the quest of determining the allocation of the specific resources. For instance last year our sitting room was being remodeled and therefore we traveled to Italy the opportunity cost of having fun with the family was derived based on the remodeling idea (Mankiw, 2012).

Question 2

Capital rationing refers to the fact that a corporation lacks the necessary resources in funding all the projects that are available.  This, therefore, means that the needs of the fund are more than the resources that the corporation can provide.   In this case, the available resources are thus allocated only to those projects that will result in maximum benefits to the firm.  These are those projects that are bound to increase the share to the shareholders before other resources are generated (Baker & English, 2011).

Question 3

The greatest benefit of ARR is based on that it is simple to compute because all the accounting information can be accessed easily but the mode of cash flow estimation tends to be challenging.  The disadvantage of this approach is that it   fails in discounting the flow of cash because it provides income averages based on time periods (Mankiw, 2012).

Question 4

The concept of incremental analysis is utilized in developing decisions through an analysis of financial data required to make suitable decisions.  This is accomplished because the analysis assists in the identification of relevant costs as well as the available alternatives and highlighting the expected effects (Mankiw, 2012).

Question 5

The term you receive what you measured implies that results are generated based on the particular things that are measured because they are the major determinant of the results.

Question 6

Information technology provides organizations with the capability of organizing large financial and utility databases, schedules and other significant information plans.  Information technology increases the responsiveness of business to opportunities (Baker & English, 2011).

Question 7

Relevant range is a description of the particular activity that is restricted by both minimal as well as maximum amounts.  This, therefore, implies to the range derived from a restricted range of revenues (Baker & English, 2011).

Question 8

A sample of variable costs includes direct materials and production supplies and on the other hand a sample of fixed coast includes salaries and depreciations (Baker & English, 2011).

 

 

 

 

 

 

            References

            Baker, H. K., & English, P. (2011). Capital budgeting valuation: Financial analysis for today's investment projects. (Capital budgeting valuation.) Hoboken, NJ: Wiley. 

Mankiw, N. G. (2012). Principles of macroeconomics. Mason, OH: South-Western Cengage Learning.