Finance and Management Research Paper

Pages: 5 (1421 words)  ·  Bibliography Sources: 5  ·  Level: Doctoral  ·  Topic: Economics

Finance for Managers

A) Opportunity cost is represented by the difference in return between one investment and another that is refused. In other words, opportunity cost is the benefit obtained by choosing an alternative action over another. This is a decision making method that we can use in our daily lives, and not only when making accounting decisions. And it does not necessarily need to address money.

Opportunity cost is one of the instruments used in making capital budgeting decisions. In addition to this, opportunity cost can help companies in manufacturing industries determining the most appropriate production technique. They can choose capital or intensive labor production methods, based on each of their opportunity cost. When an apparel manufacturing company decides to invest in producing long-sleeved shirts instead of short-sleeved shirts, the income short-sleeved shirts would have generated is an opportunity cost. Companies must deal with such decisions almost on a daily basis, which improves their skills at decision making, if they are able to analyze and interpret the results of their decisions.

B) The most critical step in the capital budgeting process is represented by cash flow estimation. This is because this estimation is influenced by several factors, like sunk costs, opportunity costs, externalities, net operating working capital changes, and salvage values. The complexity of factors influencing the capital budgeting process determines companies to increase their interest into this activity.

Specialists in the field recommend that in order to properly estimate a company's cash flow, it is important to only consider incremental cash flows (Brigham & Houston, 2012). This type of cash flow is associated with expansion projects.

2. A) The main difference between legal actions and ethical actions is that legal actions are not necessarily ethical, while ethical actions are always legal. Such a legal action can be represented by a project manager receiving all the bonuses for a successful project and not sharing it with the project team. The action is not forbidden by law, but it is not ethical, as an ethical action would be for the manager to share the bonuses with his team.

B) In the case of executives allowing themselves large bonuses while their companies were going through such a rough time, their customers dealing with extreme financial distress, and the national economy suffering from the housing bubble's effects, it is obvious that this was not an ethical action.

However, there was no legal act forbidding to grant bonuses to these executives. This decision was critiqued by all affected stakeholders: the media, customers, employees, and authorities. The lack of ethics in this case surprised an entire world.

3. A) Yes, it has happened to walk into almost empty restaurants or other locations that had few or no customers at all. It has also happened to me to go see a movie and to notice I was the very few going to that movie. This does not mean the movie was a bad one. It just meant I was going to the movies at an early hour, and after a while since the movie's release. The movie in case was an award winning one with high box office performance.

B) There are several reasons determining the restaurant's owner to keep it open during slow periods. One of these reasons is opportunity cost. In other words, the managers consider that gain that potential customers that came buy and found the restaurant closed would provide.

Another reason is more of a communication attitude. If the restaurant would close during slow times, this would be a negative signal for competitors and customers. The restaurant owners must at least maintain the appearance that they can afford to keep it open. If they were to close the restaurant, it would mean that it is not profitable enough. Although it might reopen at a different time, customers would probably have a negative impression on it.

C) the most important cost that managers must address when deciding whether to open for lunch or not is represented by opportunity cost. The managers must evaluate whether the income gained from potential served customers when closed is bigger or equal to the costs of keeping the restaurant open.

4. A) There are several reasons that determined the profitability of the newly acquired division. Some of… [END OF PREVIEW]

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