9780321818171_berk_ch03

1 what defines a good decision 2 what is the

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Unformatted text preview: ying theme applicable to all 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 gold...
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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.

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