Question

Decision making involves making an estimation of future events. What are the considerations and/or tools that allow decision makers to select the best possible alternatives? Apply your own experience or create a scenario based on the material. Be sure to address the importance of the MARR and why Cash Flow is critical versus Profits.

Answer 1

Decisions makers want to ultimately decide whether the investment which they are incurring in this current stage is worth it, depending on the return they will get after a particular duration. Thus decision makers use several tools in order to select the best possible alternatives, such as market research, moving average, trend projections, regression model and econometric models. If by using several tools the forecasts are around a similar range than decisions makers make those investment decisions, and depending on whether the particular investments would keep the company/individual sufficiently funded.

Minimum acceptable rate of return is one of the key concepts while deciding the rate which the investors need considering all their debt and future obligations. Thus when I want to invest in a project which requires $1000 cash requirement. If I have just $500, I will have to borrow the rest of it for the project. If the interest rate on the debt is 2%, I will need the MARR to be higher than 2%. If the investment is ongoing, cash flow plays an important role as it is the flow of money going in and out of the business at any particular time, whereas profits are end of the period money which the firm earns, having a steady cash flow plays an important role cause having money at the end of the period is not important for day to day transactions, cash flow gives an access to money on day to day basis in order to conduct business. For example in order to invest $1000, by spending it all at one go is not sufficient as there are last minute expenses which are incurred. If one doesn't have the money and doesn't spend, then the entire project could be in jeopardy and ultimately there would be no profit as the project itself did not get completed because of no cash flow.