Discussion on Managerial Finance

Managerial Finance
Hi,Answer all the questions given in the attached file. Show the data used and the calculations for each question in a Microsoft Excel sheet and the analysis in a Microsoft Word document.Thanks 🙂

 

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The company is considering the addition of a new office machine that will perform many of the tasks now performed manually. For this week’s task, Gerry has given you the responsibility of evaluating the cash flows associated with the new machine. He has requested the report to be delivered within the week.

Evaluation of a New Office Machine

The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful life. The machine will cost $300,000 plus another $12,000 for installation. The new asset will be depreciated using a modified accelerated cost recovery system (MACRS) 5-year class life. It will be sold for $25,000 at the end of 5 years. Additional inventory of $11,000 will be required for parts and maintenance of the new machine. The company evaluates all projects at this risk level using an 11.99% required rate of return. The tax rate is expected to be 35% for the next decade.

Tasks:

Answer the following questions:

  • What is the total investment in the new machine at time = 0 (T = 0)?
  • What are the net cash flows in each of the 5 years of operation?
  • What are the terminal cash flows from the sale of the asset at the end of 5 years?
  • What is the NPV of the investment?
  • What is the IRR of the investment?
  • What is the payback period for the investment?
  • What is the profitability index for the investment?
  • According to the decision rules for the NPV and those for the IRR, is the project acceptable?
  • Is there a conflict between the two decision methods? If so, what would you use to make a recommendation?
  • What are the pros and cons of the NPV and the IRR? Explain your answers.
  • Show the data used and the calculations for each question in a Microsoft Excel sheet and the analysis in a Microsoft Word document.

 

 

Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 1
To fundamentally improve your decision making, begin by reflecting on a few basic
questions: What is a decision, and where do they come from? Do we create them, or
does life throw them at us somehow? What is the difference between deciding, and
simply doing? You need practical answers to these questions, and you also need to
practice on real decisions to train your mind and adopt new patterns for thinking and
creating questions.
The decision matrix helps explain what decisions are, and where they come from. The
decision matrix is defined as: the conjunction of four human capacities – doing,
believing, caring, and framing. Here, matrix means “an environment or material in which
something develops;” it is derived from the Latin word for womb. Decisions are
conceived in this “womb” and are born through awareness of the conjunction of the four
capacities. These four human capacities create four corresponding dimensions of every
decision, and provide four basic categories of questions to guide inquiry about decisions.
In essence: We do things – We believe what we do can affect our future – We care
about what we do and about what happens – We don’t think about everything at once. If
1) we aren’t going to do anything, or 2) we don’t believe what we do could make a
difference, or 3) we don’t care what happens, then we don’t really have a decision to
make. Framing is the capacity to carve out a small subset of everything we might do,
believe, or care about, and view that subset of our life collectively, as a separate thing to
think about. Once we have such a frame, and the freedom to choose, then we have a
decision to make. As we move through the stream of human experience, these four
factors can come together, and we recognize a decision. This may sound very simple,
but it provides a solid foundation for inquiry that can be very sophisticated.
Based on the foregoing, we can break down the question “What is my decision?” into
four simpler questions. As you read, employ these questions and begin to reflect on a
decision of your own. This provides a simple introduction to the system.
• Action questions: What can I do? There is no decision without action – we can
act without deciding, but we cannot truly decide without committing to a course of
action. When we have decided, we do something chosen from the courses of
action we have considered – our alternatives. To have a decision, we must
choose from at least two alternatives. Otherwise, we are simply doing, not
deciding. Often we can improve decisions by asking specific types of questions
that help us explore and develop a wider range of alternatives, and create new
ones. What alternatives are you considering in your decision – what have you
considered doing?
• Information questions: What could happen? The answers to this question tell
us how our actions could shape the future. What we can do, and what happens
as a result, are separate, interrelated aspects of a decision. To make a decision,
we must have beliefs regarding how different actions could lead to different
outcomes. Such beliefs are shaped by available information. Because we all
have unique experiences and perspectives, different people may form different
beliefs given the same information. Questions can help us address biases in
how we interpret information to form the beliefs that shape our decisions. Also,
we can improve decisions by asking questions to identify critical gaps in
information, and then answer these questions to improve our decisions. The
second question is: What information and beliefs do you have about how your
actions could affect your future – how could your actions lead to outcomes? Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 2
• Value Questions: What do I care about? If you don’t care about what you do or
what could happen, you don’t have a decision to make. Once we have identified
courses of action and developed beliefs about potential outcomes, our
preferences allow us to identify the best course of action to take. Preferences
express what we value in a specific situation, and they are shaped by what we
value in general. Our values also shape the creation of alternatives and the
interpretation of information. Asking the right questions can help us improve
decisions by clarifying preferences and values, dealing with value conflicts and
tradeoffs, and exploring how values shape interpretations. What is at stake in
your decision – how will you measure success, gain or loss?
• Framing Questions. What will I include, and what will I leave out? In life, we can
take countless actions, we have unlimited available information, and we have
various values and preferences. A frame allows us focus on a relatively small,
closely related set of these when we make a decision. Without a frame, a
decision could include everything we can do, know, or care about – essentially,
our entire life – so establishing an effective frame is essential. Framing can be the
most challenging part of a difficult decision. The frame can be too narrow, or too
broad, and many different frames could be used to carve out a decision from a
given context, with widely varying results. In large part, framing is normally
implicit, unconscious, and automatic. When facing challenging decisions we can
ask questions to motivate frame reflection – that is, asking questions that help us
pay more attention to the frame, think about where it comes from, deal explicitly
with how it is shaping the decision, and shift the frame intentionally to explore
new frames. Have you paid the right amount of attention to the way your
decision is framed? What might you be leaving out? Have you left out things that
should be included? Have you anchored on things you’d be better off letting go
of?
These four aspects of all decisions – action, information, value, and frame – underpin the
system of inquiry presented here. A decision is a construction you make that occurs
when, and only when, these four aspects come together. We create decisions in a given
context as a response to events we experience and those we anticipate. Often, we do
this automatically, but we can learn to do it more consciously when we want to, by
asking questions more effectively. For challenging decisions, we can focus our inquiry
on one aspect at a time to improve the quality of that aspect (action, information, value,
frame), and we also must inquire as to how the aspects are interrelated and integrated.
Effective inquiry along these lines underpins the quality of the decision as a whole. This
is the fundamental relationship of effective inquiry to better decision-making. The
questions are not necessarily asked in a specific order, and general questions, such as
“What is going on?” or “Why are we having this conversation?” might necessarily come
first to establish an initial frame of inquiry. This may appear deceptively simple, but as
you learn to apply the system you will gain progressively deeper levels of insight, and
you will learn to use additional tools (such as influence diagrams and prospect tables) to
facilitate the inquiry process.
The figure shown below, The Decision Wheel, depicts the decision matrix at the center,
and expands the matrix to encompass eight concepts fundamental to applied decision
sciences. Each of the four capacities yields two closely related concepts represented on
opposite spokes of the wheel. Additional conceptual categories depicted in the figure –
Hard Side, Soft Side, and Deep Center – broaden the framework to provide a complete
conceptual foundation for structured inquiry about any specific decision, as well as Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 3
decision making in general. These three concepts, respectively, are embodied as Cool
Head, Warm Heart, and Guiding Soul.1 With a Cool Head, we can gain knowledge of the
world through research, and structure that knowledge using mathematics and modeling.
We build and refine a view of our decision through simulation, analysis, and thinking.
With a Warm Heart, we can gain knowledge of the world through sensitive
communication, and we structure that knowledge through interpretation of meaning. We
build and refine a view of our decision through imagination, reflection and feeling. The
head and the heart represent two modalities of learning and building knowledge through
external inquiry. The Guiding Soul represents a way of learning and knowing through
internal inquiry; we look within to integrate knowledge, understand our motivations, and
establish meaning and purpose through mindfulness and contemplation. Without this
internal modality of inquiry, the head and the heart would lack the essential guidance of
the soul, depicted as the hub of the wheel. The Decision Wheel represents a philosophy
of balance between these three ways of experiencing, learning, and knowing about the
world.
The Decision Wheel – a schema for guiding inquiry and integrating knowledge.
Like a wheel depends on the quality of every spoke and an excellent balance, a decision
depends on the quality and balance of every aspect. The Decision Wheel is the
centerpiece of the system described here. It provides a focal point for inquiry about
specific decisions and a tool for assessing decision readiness, as well as a central figure
to integrate knowledge about decision-making. Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 4
If you practice with this system, you will train yourself to instinctively recognize
opportunities to create higher quality decisions by getting the answers to certain types of
questions that have not been answered well enough. You will learn to intuitively break
decisions down into smaller, simpler pieces to gain deeper insights, without ever losing
sight of the integrated whole. You will also learn to create decisions from the scraps and
pieces of decisions that move through our thoughts and conversations. You will come to
see the forest as well as the trees that make a decision what it is. Perhaps most
importantly, you will develop a foundation to work effectively with others on difficult
decisions, both yours and theirs.
As this system becomes habitual in your thought, you will develop the ability to generate
the right questions at the right time, given whatever specific decision-making situations
in which you find yourself involved. You will empower yourself and others by seeing
decisions where you may not have seen them before, seeing which parts need
improvement, and knowing what steps to take next. This system is designed to expand
your consciousness and awareness of decision-making processes and to provide a
springboard for applying your intuition more effectively – not to replace your intuition with
a checklist of questions to ask. Indeed, you will find lists of questions below, and using
these lists will be an important part of acquiring new vocabulary and new skills, but the
point is not to replace your intuition with a list. The smartest questions are those that
have not been asked yet need to be. With practice, you will learn to ask them.
Amplification Using the Decision Wheel
Amplification is a is a central term in classical Greek rhetoric, naming a variety of general
strategies, as well as very specific procedures, to guide speech and thought. These
strategies and procedures are known as schemas (from Greek) or figures (from Latin). In
the rhetorical sense, the Decision Wheel can be considered a schema or figure of
amplification, in that it guides speech and thought according to a specific pattern. In a
practical sense, the Decision wheel can be used to generate questions, and as a
schema it implies a set of criteria necessary for effective inquiry. Assessing sufficiency
of inquiry is the topic of the next section (Appraisal Using the Decision Wheel). Thus, if
we accept the Decision Wheel schema and the assumptions behind it, we can specify
and assess both necessary and sufficient conditions for the effectiveness of inquiry
pertaining to a decision.
Amplification using the decision wheel entails asking and answering questions related to
each conceptual component of the decision wheel, in context of a specific decision at
hand. Questions for each conceptual category are provided below. Note these are
representative examples of questions for each category, and are not intended as a
complete list. In fact a complete list would not be possible, since any human being could
potentially generate new questions in each category, and in fact the generation of such
questions is a key function of the schema. Record the results of your reflection and
communication on each topic of the Decision Wheel. This can be done as an individual,
as a team, or with a decision coach or counselor.
§ Perspective, Context, Assumptions, and Relevant Background
§ What is part of the decision, and what is not?
§ Have I considered a broader frame, to include more?
§ Have I considered a narrower frame, to include less?
§ What is making this problem/decision difficult?
§ Whose choice is this, who should be involved? Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 5
§ How might someone else frame this decision? (e.g., an expert, a
competitor, someone I respect, someone who has faced a similar
situation)
§ What are my basic assumptions, things I take as given?
§ What reference points am I using? (e.g., for measuring value, change,
importance)
§ What biases in my perception and interpretation of information might be
shaping my beliefs?
§ Preferences/Values
§ What would an ideal outcome look like? What do I hope to accomplish?
§ Could I explain to someone why I prefer one outcome to another?
§ What is at stake in this situation?
§ What tradeoffs do I need to make, and how will I make them?
§ Have I considered the concerns of all the stakeholders I care about?
§ Have I truly considered all costs and side-effects, as well as the benefits?
§ Have I considered the ethical implications of my actions and my process?
§ Which of my core values and life purposes are involved in this situation?
§ How will I quantify and measure what I care about, including time
preferences, tradeoffs, and risk preferences?
§ Alternatives
§ Have I generated a set of diverse and compelling alternatives?
§ Is the set logically complete (e.g., all or nothing, combinations)?
§ Have I considered what others might do?
§ Would I change my mind if I reflected on alternatives I ruled out?
§ Who could help me design better alternatives?
§ Do I have too many alternatives with only minor variations?
§ Have I thoroughly considered and modeled the “Do Nothing” alternative,
either as a point of reference or as a meaningful choice?
§ Have I considered trying on the “pink suit”? (Matheson)
§ Information
§ Have I considered the possible outcomes and consequences of the
alternatives, both upside and downside?
§ Have I clearly and logically linked the actions I might take to outcomes,
preferences, and values?
§ How likely is each of the outcomes?
§ Is the information I’m using credible; why do I believe it?
§ Have I gotten all the information I need, talked to people who would
know?
§ Have I appropriately represented and dealt with uncertainty?
§ What do I wish I knew, and what stops me from getting the information I
wish we had?
§ Is it worth getting more information before deciding?
§ Resources/Enablers
§ Do I have everything I need to implement the alternatives?
§ Have I considered obtaining what I don’t have, but might be able to get, to
enable a better course of action?
§ If I only had _________ then I could __________. Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 6
§ Constraints
§ Have I reflected upon and understood the material constraints?
§ Are there ways I could acquire additional resources to overcome my
current constraints?
§ How can I express the various aspects of my perspectives and
assumptions as concrete material constraints?
§ Communication
§ Whose input do I value in this situation?
§ Have I identified who should be involved, and how they should be?
§ Have I reflected upon and discussed the frame with the right people?
§ Have I sought out and encouraged input from others who could challenge
my frame?
§ Commitment
§ What could prevent me from acting, even if I’ve decided what to do?
§ Is everyone behind the final choice who is needed to “make it so”?
§ Does the chosen alternative feel right to all involved?
§ Are all the relevant stakeholders behind the decision and prepared to do
their part?
§ Am I confident I have generated an excellent set of alternatives?
§ Have I identified the best alternative?
§ Would someone I respect and care about agree with my choice?
§ Have I made only a mental comment, or am I truly ready to act?
§ Have I established a clear and definite timeframe for resource allocation,
action, and follow-up with all the stakeholders involved?
§ Integration Process – balance and reflection
§ Have I balanced systematic thought and logical reasoning with gut
instincts and emotions?
§ Have I balanced research about the world with deep reflection and
appropriate contemplation to bring out my internal knowledge and
understanding of my purpose?
§ Have I used both communication and reflection to surface implicit
assumptions?
§ Have I factored in all the useful information and values in my analysis and
selection process?
§ Could I defend my approach for comparing alternatives and making a
choice to a non-advocate?
§ Do any conflicts, inconsistencies, or questions remain in my knowledge or
in my heart?
Amplification is part of the appraisal process, and should be done first. At the completion
of the Amplification Process, a list of unanswered questions and possible ways of getting
them answered should be produced. This will provide a basis for the appraisal.
Appraisal Using the Decision Wheel2
In appraisal using the decision wheel, we will assume the quality of a decision is
determined by the quality of the inquiry process that precedes the commitment to a
course of action. We will not appraise the quality of the decision, but the effectiveness of Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 7
the inquiry around the topics of the Decision Wheel, up to the time of the appraisal. Fully
effective inquiry means all the necessary questions have been asked, and the answers
are complete and credible. We can rate the effectiveness of the inquiry for each topic,
from zero to 100%, and graph the results on each “spoke” of the decision wheel, with 0%
at the center, and 100% on the circumference of the wheel. If all topics of inquiry are
rated at 100% effective, then the graph on the wheel will be full and round – “ready to
roll”. Always provide an explicit explanation/rational for the rating corresponding to each
“spoke”. Provide a separate rating for the “Integration Process” topic. If we have a
decision team or coach, each involved person can make separate ratings privately, and
then compare their separate ratings with each other. Explaining the rationale for the
ratings and addressing inconsistencies can generate key insights. In the absence of
significant frame shifts, a trend toward completion and readiness to decide should be
observed if the appraisal process is periodically repeated – the graph will get rounder
over time, with work. (See following page.)
Appraisal Procedure
1. Appraisal is a natural follow-on to amplification. Complete “Amplification Using
the Decision Wheel” and document the results.
2. Make a graph of the decision wheel, and label the spokes (or use the figure
below).
3. First, consider your amplification for one spoke of the wheel. Consider additional
questions that might be appropriate for that amplification topic.
4. Rate the effectiveness of the inquiry for that topic on its corresponding spoke of
the wheel, with 0% at the center, and 100% on the circumference of the wheel.
Fully effective inquiry means all the necessary questions have been asked, and
the answers are complete and credible.
5. Write down the rationale, and any conflicting ideas, regarding the choice of a
numerical rating.
6. Do this for every spoke of the wheel, and rate the Integration Process separately,
from 0% to 100%.
7. Which areas are most in need of improvement?
8. What “next-steps” can be identified for the decision maker? (think of the three
modalities of inquiry – hard side, soft side, and deep center. Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 8
Decision Appraisal Graph – for use after Amplification Using the Decision Wheel.
Notes Decision Amplification and Appraisal – a Source of Decision Quality
© 2016 David Bergner – All rights Reserved 9
1
Cool Head, Warm Heart, Guiding Soul. Alfred Marshall (1822-1924) inspired the Cool
Head/Warm Heart distinctions with the following: “It will be my most cherished ambition,
my highest endeavour, to do what with my poor ability and my limited strength I may, to
increase the numbers of those whom Cambridge, the great mother of strong men, sends
out into the world with cool heads but warm hearts, willing to give some at least of their
best powers to grappling with the social suffering around them; resolved not to rest
content till they have done what in them lies to discover how far it is possible to open up
to all the material means of a refined and noble life.” The “Guiding Soul” distinction
captures the imperative to incorporate the transpersonal dimension in any integrated and
balanced approach to studying or facilitating human decision making.
2
Appraisal process – Extension of prior methods. Howard, Strategic Decisions Group,
DA for the professional, SmartOrg, etc.

 

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