Decision Making

Skills
3rd Internal Assignment
Submitted by : Vinay Thakre And
Arpita Bandod

 ABOUT
SHYAM LAL AND
ASSOCIATE
partnership firm - 1992 Owns 1 -cold storage cum
1 3
main office - Delhi warehouse - Azadpur, Delhi

engaged in -
processing -industrial chemicals, work officlocated in -
2 4
production of hardware goods Faridabad, Haryana
and leather products
Problems :-
NEW INVESTMENT COST SAVING
PROPOSAL PROPOSAL
invest in a plant
which can
produce a new invest in a
chemical would machine
which would
experiencing shortage of be widely
1 accepted and help the
funds caused by low profits used by the company to
manufacturers of reduce the
plastic bags. costs

EXPANSION FINANCING AND

PROPOSAL ITS COST

instalment payments of
2 inst all
term loan to Vishal Bank require about Rs.
refr iger atio n
65 lakh of funds
syst em in to finance the
thei r new ly three proposed
acq uire d projects in case
com plex they are accepted
NEW INVESTMENT
PROPOSAL

COST SAVING
PROPOSAL
EXPANSION
PROPOSAL
FINANCING AND
ITS COST
Question 1 :-
the investment decision,
1. What is the nature of problems
being faced byShyam Lal? What are
the key characteristics of the
options he is examining? How
should he decide?
Shyam lal is dealing with
And Its Characteristics
are
2 (i) Substantial
expenditure
(ii) Long time period
(iii) Irreversibility
(iv) Complex decisions
He should decide by evaluating
projects using these techniques.
Question 2 :- Time value of money (TVM) is a concept that
states that money available at the present
time is worth more than the same amount in
the future due to its potential earning
capacity. This is often considered in financial
2. Why do you think he decision making, as it can help to determine
the potential value of future cash flows and
should consider time
the present value of a future investment. One
value of money and
should consider TVM when making
what do you do you
investment decisions, because it helps to
mean by time value of
understand the relative value of money at
money?
different points in time and how it can be
used to generate additional wealth.
Question 3 :-
For this purpose he
should use Cut off rate
that
2 is 12% given in the
case
3. For this purpose what discount
rate should he use?

Question 4 :-
4. Explain the concept of present
value and future value. While
evaluating the profitability and
repayment schedule of various
projects use the following
concepts: (a) Future value factor,
FVFn,r (b) Future value annuity
factor, FVAFn,r (c) Present value
factor, PVFn,r (d) Present value
annuity factor, PVAFn,r
Present value is the current value of a future
sum of money or stream of cash flows given
a specified rate of return. Future value is the
value of an asset at a specific date in the
future that is equivalent in value to a
specified sum today.
For example, if you have $100 today and you
want to know its value in 5 years with an
interest rate of 5%, the future value would
be $127.63 (100*1.05^5). On the other
hand, if you know you will have $127.63 in 5
years and you want to know its present value
today, it would be $100 (127.63 / (1.05)^5).
Brainstorm Area
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 When you divide an amount by the present value
annuity factor (PVAFn,r), the result represents the
annual payment of an annuity that is equivalent in

Question 5 :-
value to the given amount at the present time,
assuming a specific interest rate (r) and a specific
number of payments or periods (n).

For example, let's say you have $100,000 and you

want to know the annual payment of an annuity
that is equivalent in value to this amount,
assuming an interest rate of 5% and a 20-year
period. Using the PVAF formula, the PVAF20,5% =
2 so the annual payment would be
5.9077,
$16,921.05 (100,000/5.9077).
5. How do you interpret the results

Similarly, when you divide an amount by the future

when you divide any amount by value annuity factor (FVAFn,r), the result
PVAFn,r? And similarly for FVAFn,r? represents the present value of an annuity that
will generate the given future amount, assuming a
specific interest rate (r) and a specific number of
payments or periods (n).
Question 6 :-
Factors Affecting Financing Decisions:
While taking financing decisions the finance
manager keeps in mind the following factors:

1.Cost
2.Risk
6. What factors should he
consider while evaluating 3.Cash Flow Position
financing decision? 4.Control Considerations
5.Floatation Cost

That's a wrap!
Thank you for participating!