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Financial Management Decision

In: Business and Management

Submitted By pcap139
Words 2760
Pages 12
Introduction Making financial decisions involves balancing risks and profitability. Financial management is the operative way for a firm to organize and control financial resources of a firm in order to exploit profitability and ensure liquidity for a company. The three types of financial management decisions are capital budgeting, capital structure, and working capital management. It is important that the decisions being made in regards to financial management be concise, educated, and understandable. This paper addresses the three types of financial management decisions which guide companies in the direction for success, and will point out a few possible ethical problems company’s may face in their quest for that success.
Part 1: Capital Budgeting Capital budgeting is the process of planning and managing a firm's long-term investments. “Evaluating the size, timing, and risk of future cash flows is the essence of capital budgeting” (Ross, Westerfield, Jordan, 2007, p. 5). The size, timing, and risk of future cash flows are the most important things to consider with capital budgeting. Formal methods that are used in capital budgeting include profitability index, valuation of future cash flows, and net present value. Profitability index is the present value of an investment’s future cash flows divided by its initial cost, also known as benefit-cost ratio. The index measures the value of each dollar invested in the company and is rationed from the present value of the benefits (PVB) to the present value of the costs (PVC). The index is used instead of Net Present Value, which is the present value of benefits minus present value of costs, when evaluating mutually exclusive proposals that have different costs. The advantages of using the profitability index are it tells whether an investment increases the firm's value; considers all cash...

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