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the financial concepts you will learn. 1. What defines a good decision?
2. What is the financial manager’s role in decision making for the firm? 12/15/11 8:08 PM Chapter 3 The Valuation Principle: The Foundation of Financial Decision Making 69 3.2 Cost-Benefit Analysis
As we have already seen, the first step in decision making is to identify the costs and
benefits of a decision. The next step is quantifying the costs and benefits. Any decision
in which the value of the benefits exceeds the costs will increase the value of the firm.
To evaluate the costs and benefits of a decision, we must value the effects in the same
terms—cash today. Let’s make this concrete with a simple example.
Suppose a jewellery manufacturer has the opportunity to trade 200 ounces of silver
for 10 ounces of gold today. An ounce of silver differs in value from an ounce of gold.
Consequently, it is incorrect to compare 200 ounces to 10 ounces and conclude that the
larger quantity is better. Instead, to compare the costs of the silver and benefit of the
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.
- Spring '07