Manager's Basic Tools Used for Making Financial Decisions

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Manager’s Basic Tools Used for Making Financial Decisions Willie A. McCall Principles of Finance – Writing Assignment 1 Professor Eleanor Cook 30 January 2011 Manager’s Basic Tools Used for Making Financial Decisions Explain why market prices are useful to a financial manager. A competitive market is one which a good can be bought and sold at the same price. We can use prices from competitive markets to determine the cash value of a good. Whenever a good trades in a competitive market, the price determines the value of the good. Financial Managers must be able to evaluate costs and benefits in order to make the appropriate decisions that benefit the company. Once we use the market prices to evaluate the cost and benefits of…show more content…
When the value of a cost or benefit is computed in terms of cash today, we refer to it as the present value. The net present value of a project or investment is the difference between the present value of its benefits and the present value of its cost. The NPV expresses the value of an investment decision as an amount of cash received today. As long as the NPV is positive, the decision increases the value of the firm and is a good decision regardless of your current cash needs or preferences regarding when to spend the money. The NPV decision rule implies that we should undertake projects with a positive NPV. Managers only take the good projects, those for which the present value of the benefits exceeds the present value of the costs. The end result, the value of the firm increases and investors are wealthier. Projects with negative NPVs have cost that exceed their benefits. Accepting them is equivalent to losing money. Explain how an interest rate is just a price. To understand interest rates, it’s important to think of interest rates as a price, the price of using money. When you borrow money to buy a car, you are using the bank’s money now to get the car and paying the money back over time. The interest rate on your loan is the price you pay to be able to convert your future loan payment into a car today. Similarly, when you deposit money into your savings

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