Many would argue that in a capitalistic economy, the government cannot provide goods and services as efficiently as the private sector. For example, most arguments for and against th

Long-term Decisions.html

Long-term Decisions

Long-term decisions made by management have long-term consequences and cannot be changed readily. Therefore, long-term-planning decisions must be made considering all possible costs and revenues as well as long-term consequences for the market and the company's operations. For example, long-run decisions do not relate to how many machines should operate but to how many machines should be purchased and be available for production.

The capital-budgeting process is a set of procedures designed to incorporate as many variables as possible when making long-term planning decisions. These decisions are made for many reasons including changes in consumer tastes, new technologies or products, or new competition in the market. Most long-term investment decisions can be evaluated using this process.

Some common capital-budgeting decisions include the following:

• Replacement decisions, which means decisions to replace existing facilities and equipment
• New product lines, which means decisions about developing new products or improving existing products
• New technologies, which means decisions about employing new technologies in the production process

Management must use the capital-budgeting process to identify new opportunities available to the company and to correct inefficiencies, which can include any project or activity that has long-term consequences to the company and its operations. Although decisions are usually made by senior management, the capital-budgeting process should involve stakeholders from all divisions of the company.

In the short run, management must make decisions that are important to the success of the company. For example, management decides how many machines should be operating in a given plant size at any point in time and how long a certain level of production should continue. Such decisions are usually relevant for a short period of time and can be changed, as needed.

Government Intervention.html

Government Intervention

Market failure is a situation in which a competitive market does not allocate enough resources or allocates too many resources for the production of certain goods and services. That is, market failure results in either a surplus or a shortage of certain goods or services.

 Market failure forces government involvement in the market. In a true capitalistic system, the government would have no role in the market system other than acting as an umpire, enforcing rules, and making sure that all the players compete in a fair manner. However, in today's society, the degree of government involvement in the market system goes well beyond the role of an umpire.

 The question then is how much government involvement is needed or desired in a market-based economy? Are government solutions more efficient than private solutions? There are no precise answers to these questions. Each society must come to its own conclusions as to how much the government should be part of the market system. More government involvement in the marketplace results in fewer decisions being made by the managers of private enterprises.

 Although no one economy will fit the definition exactly, there are basically three types of economies:

• Socialistic economy- the government owns, operates, or heavily regulates the majority of the otherwise private industries.
• Capitalistic economy- the government only serves as a intermediary or an umpire leaving the economic and business decisions to the private sector
• Command economy- the central government makes all the decisions in terms of what will be produced and how much.

Capital Budgeting.html

Capital Budgeting

There are 3 major steps in the capital-budgeting process.  After identifying the opportunities available to the organization, these opportunities must be evaluated using the various parts of the capital-budgeting process.

First, identify cash flows relevant to the project. This is probably the most difficult step because management must estimate both costs and revenues on the basis of the information collected from all sources and unbiased projections or forecasts of this information. The data (cost and revenue estimates) must also be on an incremental basis, which refers to the difference that these projections make in terms of what the company is already experiencing if the project is implemented.

Second, evaluate cash flows.  Cash flows involve an examination of information and should be evaluated in terms of meeting minimum return requirements of the company. The three most commonly used methods for this purpose are NPV, IRR, and Payback. The most accurate of these methods is NPV.

Third, you need to make a decision.  The decision to accept or reject an investment depends on the decision rules of the evaluation method employed.

Several methods can be used to incorporate risk into the evaluation of a project. These methods include decision trees, probabilities, certainty equivalents, or simulations, to name a few. One additional method is the risk-adjusted discount rate. This method simply adds a premium for risk to the discount rate, making it more difficult for a project to be acceptable to the firm.