Nearly all financial decisions ultimately come down

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Unformatted text preview: al finance is marginal analysis, the principle that financial decisions should be made and actions taken only when the added benefits exceed the added costs. Nearly all financial decisions ultimately come down to an assessment of their marginal benefits and marginal costs. CHAPTER 1 EXAMPLE The Role and Environment of Managerial Finance 11 Jamie Teng is a financial manager for Nord Department Stores, a large chain of upscale department stores operating primarily in the western United States. She is currently trying to decide whether to replace one of the firm’s online computers with a new, more sophisticated one that would both speed processing and handle a larger volume of transactions. The new computer would require a cash outlay of $80,000, and the old computer could be sold to net $28,000. The total benefits from the new computer (measured in today’s dollars) would be $100,000. The benefits over a similar time period from the old computer (measured in today’s dollars) would be $35,000. Applying marginal analysis, Jamie organizes the data as follows: Benefits with new computer Less: Benefits with old computer $100,000 35,000 (1) Marginal (added) benefits Cost of new computer Less: Proceeds from sale of old computer (2) Marginal (added) costs Net benefit [(1) (2)] $65,000 $ 80,000 28,000 52,000 $13,000 Because the marginal (added) benefits of $65,000 exceed the marginal (added) costs of $52,000, Jamie recommends that the firm purchase the new computer to replace the old one. The firm will experience a net benefit of $13,000 as a result of this action. Relationship to Accounting The firm’s finance (treasurer) and accounting (controller) activities are closely related and generally overlap. Indeed, managerial finance and accounting are not often easily distinguishable. In small firms the controller often carries out the finance function, and in large firms many accountants are closely involved in various finance activities. However, there are two basic differences between finance and accounting; one is related to the emphasis on cash flows and the other to decision making. Empha...
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