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Better decision making
1.
2. Better Decision
Making
Presented By: Anu Mishra
M.B.A 3rd Sem
B.U
3. Financial Decision-Making
• Performing a Cost/Benefit Analysis is essential
to sound financial decision-making
• A critical part of a Cost Benefit Analysis is
determining the value of money over time
4. Time Value of Money
• Money’s value changes over time
• A dollar today is worth more than a dollar
tomorrow
• When time value is considered, the cost-
effectiveness of a project can change
5. Today’s dollar is worth more because:
• Interest rates
$100 you invest at a 4% interest rate today will be
worth $104 in 1 year, thus making today’s money
worth more
• Inflation
You purchase 20 items today at $1.00 each for
$20.00
After one year, due to inflation, those same items
cost $1.50 each and you can only purchase 13.33
of that same item with our $20.00. Thus, today’s
money is worth more.
6. Value of Money Over Time
Future Value
Measures what today’s money would be worth
at a specified time in the future assuming a
certain discount rate
Present Value
Measures what money at a specified period of
time in the future would be worth if valued in
terms of today’s money
7. Why Better Decision Making is
Necessary ?
• Uncertainty - Many facts may not be known.
• Complexity - You have to consider many interrelated
factors.
• High-risk consequences - The impact of the decision may
be significant.
• Alternatives - Each has its own set of uncertainties and
consequences.
• Interpersonal issues - It can be difficult to predict how
other people will react.
8. Discount Rate
• The rate used in calculating the present value
of expected yearly benefits and costs
• Used to reflect the time value of money
• The higher the discount rate, the lower the
present value of future cash flows
9. A Systematic Approach to Decision
Making
There are six steps to making an effective decision:
• Create a constructive environment.
• Generate good alternatives.
• Explore these alternatives.
• Choose the best alternative.
• Check your decision.
• Communicate your decision, and take action.
