Reference no: EM132180295

Module Overview

A business starts when an idea is put into action. However, before you start a new business, you should check the idea for feasibility and profitability.

This means that you should study the market-what customers want and what the market has to offer. Market research will help you analyze whether your product, service, or process can fill a gap.

In the previous modules, you discussed some components involved in management's decision-making process. In this module, you will continue to discuss those concepts.

One critical decision made among companies is to price a product or a service. Pricing a product or a service requires a balance to establish a price that covers all the associated costs.

At the same time, the price should not be too high to deter consumers from purchasing. This module will introduce you to various costing modules that management can use to estimate or determine the cost of its product or service.

With few exceptions, businesses either grow or fail. If projects simply become bigger but do not change in character, the firm can grow financially with little growth in people.

However, in most of the cases, growth comes from a combination of bigger projects and smaller projects-and these require more people. However, a company must demonstrate financial controls at every level of the organization-and the only way to do this is by sharing the discipline of financial decision making throughout the firm.

Module Readings

Complete the following readings early in the module:

Module overview

From your course textbook, The portable MBA in finance and accounting, 4th, read the following chapters:

Forecast and Budgeting

Cost Structure Analysis, Profit Planning, and Value Creation

Activity-Based Costing

Module Conclusion

An understanding of cost behavior is vital in developing pricing strategies. Making profit is the primary objective for any for-profit entity.

To make a product, the costs to produce a product or the costs to provide a service as well as the related administrative costs must be recovered when sold.

Applying the costing methods and techniques discussed in this module will assist management in making such decisions.

In addition, management must understand how each category of costs, such as direct costs vs. indirect costs or fixed costs vs. variable costs, behaves in order to make well-informed decisions about cost effectiveness and efficiency.

In this module's assignments, you will evaluate the considerations necessary to determine an appropriate business form for a new business.

You will also evaluate the financial aspects of making decisions.

Assignment: Financial Decisions

Instructions:

In both your professional and personal life, you will make a variety of decisions. You should consider the financial and nonfinancial aspects while making decisions.

To evaluate scenarios, you will also use some tools such as net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), payback, discounted payback, and return on investment (ROI) that you have discussed so far.

In this assignment, you will evaluate the financial aspects of making decisions.

Tasks:

Investigate any two of the following four financial decisions:

1) Using net present value calculations, determine which has a higher ROI. Assume the average mileage under both options is 15,000 miles.

The car will be sold for its Kelly Blue Book value at the end of ownership or it will be returned to the leasing dealership for no additional lease/return/mileage cost.

The automobile being considered is a 4-cyl, 2.5 liter, two-wheel drive, Nissan Rogue sport utility. At the end of the 6 years, the automobile is in very good condition. Tax, title, or license fees are not considered under either option.

Buying a Nissan Rogue today for $32,000, putting $10,000 down and taking a six-year loan for the rest at 4%

or

Leasing the Rogue for 6 years at $360 a month with a down payment of $3,500 due at delivery. The car must be returned at the end of the lease. 15,000 miles per year are allowed under this lease plan.

Show your work and explain your rationale.

2) Commit to buy a vacation home in the climate of your choice, rent the home out when you are not using it, or sign a five-year lease for the home for the two months a year you plan on using it. You will need to make up the numbers for your home for this exercise.

3) A different buy-or-lease alternative-you could buy a home for $300,000, putting 20% down and renting it out at $1,700 a month. Which would make more financial sense? Buying or leasing the home? Explain your rationale.

4)Lease your home for the next three years or sell it with the intent to return to the same geographic area after you complete a three-year expatriate assignment in the country of your choice. Given the facts above, should you lease the house or sell it? The current market value is approximately $320,000. Explain your rationale, and show your work.

For the two options that you selected (and using the figures given above for those options), investigate the realistic assumptions for your location and include the information you found in the analysis. Create a paper in about 1,000-1,200 words, including the following:

Initial information/approach: purchase price, rebate, down payment, amount to finance, etc.

Payments formulas and calculations

Explanation of the financial factors that you are employing in the selected decisions

Conclusion containing the "best answer" for your personal life on the basis of these financial factors

Probability of following the recommended "best answer" (assuming that these are the only decision options)