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Lecture 1

The document discusses key decisions business leaders face such as establishing a vision, accumulating and deploying resources to realize that vision. It also covers evaluating investments to determine if they contribute to the vision, provide enough benefits, and are at an acceptable risk level. Formulas and examples are provided for calculating economic profit, net present value, and how wealth maximization benefits different stakeholders.

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Maria Rahman
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16 views7 pages

Lecture 1

The document discusses key decisions business leaders face such as establishing a vision, accumulating and deploying resources to realize that vision. It also covers evaluating investments to determine if they contribute to the vision, provide enough benefits, and are at an acceptable risk level. Formulas and examples are provided for calculating economic profit, net present value, and how wealth maximization benefits different stakeholders.

Uploaded by

Maria Rahman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Lecture 1

Type of Decisions Faced by Business


Leaders
A vision is a general description of how the company will position
1. Establish a vision; itself to offer to customers something with value in excess of cost

2. Accumulate resources to realize that vision;

3. Deploy resources to realize that vision.


Test that a Investment must meet
Does the expected benefits
1. Does it contribute to the vision; exceed the cost of resources
used?

2. Will it provide enough benefit to satisfy the investors who financed;


Stock Price – Wal-Mart
On Feb 1, 1973 $0.0432
3. Is the investment at an acceptable level of risk. On Feb 9, 2024 $169.28
3,918.51 Times in 51 years
Calculating an Economic Profit

Revenue $250,000
A company with $500,000 in Expenses $120,000
assets, a risk level requiring a Taxable Income $130,000
10% cost of funds, revenues of Taxes $45,000

$250,000, expenses of $120,000, After tax accounting income $85,000

and taxes of $45,000. Requires return $50,000


Economic profits $35,000
Calculating a Net Present Value
Description Year 1 Year 2 Year 3
You can purchase the endorsement
Additional revenue $500,000 $500,000 $500,000
of a famous athlete for next 3 years
Variable expenses 100,000 100,000 100,000
for $400,000. Your marketing
Fixed expenses 75,000 75,000 75,000
department believes that this
Taxable Income $325,000 $325,000 $325,000
endorsement will increase sales by
Taxes 130,000 130,000 130,000
$500,000 per year for next 3 years.
After tax accounting income $195,000 $195,000 $195,000
Your variable cost (cost that vary
Present value interest factor 0.9091 0.8264 0.7513
directly with sales) are 20%,
Present value $177,275 $161,148 $146,504
additional fixed costs are $75,000
Total present value of benefits 484,926
per year, and taxes are 40%.
Cost of the endorsement 400,000
Net present value of this project $84,926
Who Benefits from Wealth Maximization
1. Owners
2. Managers
3. Creditors
4. Customers, Employees, and Suppliers
5. Society

What happens to Nonprofit Organization?


Flow Chart of the Capital Investment Process
Establish Goals

Develop Strategy

Search for Investment Opportunity

Evaluate Investment Opportunity

Select Investments

Implement and Monitor

Post-Audit

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