Question

1. Provide examples of social and economic factors that have increased the importance of personal financial planning today.

2. What is opportunity cost?

3. What are possible drawbacks associated with not considering opportunity cost when making decisions?

4.Describe risk that you might encounter when making financial decisions over the next few years?

Answer 1

1. Provide examples of social and economic factors that have increased the importance of personal financial planning today.

Answer: Economic factors include Inflation, political issues, monetary policies and its vast impact on the interest rates, savings, Investment norms, Taxation laws etc; Similarly social issues include age factor, diseases, children education and other financial obligations. All these are important and to be considered while planning the personal financial forecast.

2. What is opportunity cost?

Answer: Opportunity cost is the concept used in the Capital Budgeting Techniques. This is the cost or loss which is anticipated due to the implementation of the proposed new project or change for which the capital budgeting is being used. Examples generally include the loss of revenue from one stream or product by introduction of new product. or Additional cost on some other product due to the intruction of new product, etc. These are important to be considered as part of projections considered for Capital Budgeting.

3. What are possible drawbacks associated with not considering opportunity cost when making decisions?

Answer: It is important for Opportunity costs to be considered as part of projections considered for Capital Budgeting. Otherwise, the said costs or loss shall not get counted as part of the future cash flow projections and result in the incorrect valuation or results. Once the Project is implemented, then there shall be significant deviation in the actual free cash flows as compared to the projected ones, resulting in the exposure of failure of the project.

4.Describe risk that you might encounter when making financial decisions over the next few years?

Risk is an inherent concept to be considered in every investment for financial planning or decision making. Two major components of risk are systematic risk and unsystematic risk. Systematic risk is a result of external and uncontrollable factors. These might not industry or sector or security specific and it can affect the entire market leading to the fluctuation in prices of all the assets / businesses / securities / investments.

On the other hand, Unsystematic risk refers to the risk which emerges out of controlled and known variables that are industry or sector or security specific.

Examples of risk that might be specific to individual companies or industries are business risk, financing risk, credit risk, product risk, legal risk, liquidity risk, political risk, operational risk, Global factors etc. Unsystematic risks are considered governable by the Company or industry.

Certain risks among these might not directly have impact on the personal financial planning; however, since these shall have the macro impact, they might indirectly impact overall.