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Financial Decision-Making and Capital Markets: An In-Depth Analysis

The paper provides an in-depth analysis of financial decision-making processes and their connection to capital markets.

Daniel Kim
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Financial Decision-Making and Capital Markets: An In-Depth AnalysisFINANCEQUESTIONS: WEEKONEDiscussion Questions1.Describe in your own words why financial decisions are based on incremental benefits? Howdoes a sunk cost affect the incremental benefit from a decision?The decision to produce or purchasecomponents should be made on the basis ofincremental analysis.Incremental benefits assist in making a determination of whether or not aspecific decision or move is beneficial. Basically, it makes one consider the consequences ofmaking such a decision or move. Such a consideration is essential since it most-likely will affectan organization’s finances in one way or another.Book value is considered to be asunk cost,which is basically a cost which is unable to bealtered by any present or future decision.Sunk costs are not really applicable within incrementalanalysis. In many cases, if certain assets are retained, the book value will be depreciated over theassets’ remaining [useful] life. Likewise, in many cases, if a new unit is purchased, the bookvalue will be considered as a loss in regard to the current period. Therefore, the effect of bookvalue on both current and future earnings is identical, no matter what the replacement decisionmay be.Nonetheless, I would imagine that the cash disposal value of an existing asset would beimportantin regard to the decision due to the fact that this particular value will not be realized inthe case in which the asset is continued to be utilized.

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