Capital Budgeting Analysis
Added on 2019-09-23
17 Pages2924 Words500 Views
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Financial & Economic literacy for managers
IntroductionIn this present paper, we will analyze the impact of Financial and Economic Literacy forManagers. In the first phase, we will describe the classification of production, opportunity cost,evaluation of UK standards, demand curves and income and substitution effect. In the secondphase, we will explain types of markets, public goods, four macroeconomic policies and thecircular flow of income. In the third phase, we will describe four areas of finance, determinantsof market interest rates, formats of four basic financial statements, ratio analysis from thefinancial statement of 2014. In the last phase, we will describe the importance of capitalbudgeting, use of NPV technique, yield curve and the selection of projection among the twoprojects.Q1.a.The production is defined as the process of converting the input into output. Followingare the three classifications of production process:1.Job productionIn this process, non-standardized products are produced according to the ordersreceived from the consumers. The machines and equipment are designed in such away that they can suit according to the requirements of a particular job (Jonsson etal., 2015). For example: Stationary machinery layout.2.Batch productionIt is defined as the process in which repetitive production of goods take place, andthe order is received in advance. The job production is similar, but the quantityvaries. For example: Motor Manufacturing, Tinned food.
3.Flow productionIt is defined as the process of manufacturing in a lot of standardized products. Theflow of production is continued and progressive. For example: Manufacturing ofcars.b.Opportunity cost is defined as the potential benefit which is given up by choosing oneoption over another. It is not allocated in the books of accounts but takes an importantrole in decision making for selecting the project. It is a cost of choosing another optionbetween two or three options. The opportunity cost can be explained in terms of time,mechanical output and others. It is the cost of missing an opportunity. For example Theraw material purchased can be purchased from two suppliers, company A and B. The costof purchasing from A is $10,500 and from B is %10,300. Then, the opportunity cost ofpurchasing from A $100 in about B. The owner’s decision of purchasing from A willconsider the cost of lost opportunity to save $100. c.The UK standard industrial classification was introduced in the UK in 1948. The purposeof classification is to divide the business establishments and other statistical units on thebasis of economic activities in which they are engaged (Jones et al., 2013. Theframework of classification provides tabulation, presentation, collection and analysis ofdata in monetary terms.It is evaluated by a hierarchy of five digit system. The UK SIC isdivided into 21 sections, and each is denoted by the single letter from A to U. The lettersare uniquely defined by next breakdown. The divisions are divided into three digit groupsthen into four digit classes and again into subclasses if required.
d. The demand curve is defined as the curve which represents the demand for a particulargoods and services on a particular price. The graphical representation of demand curveincludes the price on Y-axis and quantity on the X axis. Following is the use of shift indemand curve and movement along the demand curve.Shift in demand curveIt is used to determine the change in consumer’s preference. If the consumers aresatisfied and interested in buying the product on the prevailing price then thedemand shifts to the right. Similarly, if the consumers are not satisfied with theproduct at a prevailing price, then the demand shifts to the left. The factors whichaffect the demand curve include the change in consumer’s preference,expectations, change in trend, income, and others.Movement along demands curveThe moving demand curve takes place by changes in price which affect thedemand due to which movement takes place along with the curve. It is used tocheck the demand for change in price.
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