Question

Give an example of a personal financial decision that may make and why you made the decision that you made? Include quantitative and qualitative factors and opportunity costs and sunk costs.

Answer 1

Examples of business decisions:
Buying new equipment versus remodeling old equipment
Choosing which products to manufacture
Expanding into a new area or country
Diversifying by buying another business

The process of decision-making in a managerial business environment can be summed up in these steps.
1.Identify the objective or goal. For a business, typically the goal is to maximize revenues or minimize costs.
2.Identify alternative courses of action that can achieve the goal or address an obstacle that is hindering goal achievement.
3.Perform a comprehensive analysis of potential solutions. This includes identifying revenues, costs, benefits, and other financial and qualitative variables.
4.Decide, based upon the analysis, the best course of action.
5.Review, analyze, and evaluate the results of the decision.

A sunk cost is one that cannot be avoided because it has already occurred. A sunk cost will not change regardless of the alternative that management chooses; therefore, sunk costs have no bearing on future events and are not relevant in decision-making. The basic premise sounds simple enough, but sunk costs are difficult to ignore due to human nature and are sometimes incorrectly included in the decision-making process. For example, suppose you have an old car, a hand-me-down from your grandmother, and last year you spent $1,600 on repairs and new tires and were just told by your mechanic that the car needs $1,200 in repairs to operate safely. Your goal is to have a safe and reliable car. Your alternatives are to get the repairs completed or trade in the car for a newer used car.

When choosing between two alternatives, usually only one of the two choices can be selected. When this is the case, you may be faced with opportunity costs, which are the costs associated with not choosing the other alternative. For example, if you are trying to choose between going to work immediately after completing your undergraduate degree or continuing to graduate school, you will have an opportunity cost. If you choose to go to work immediately, your opportunity cost is forgoing a graduate degree and any potential job limitations or advancements that result from that decision. If you choose instead to go directly into graduate school, your opportunity cost is the income that you could have been earning by going to work immediately upon graduation.