Principles of Finance , 1103809069
PRINCIPLES OF FINANCE
HW 1: INTRODUCTION
DUE WEDNESDAY OCTOBER 20, 2010 QUESTION 1: FINANCE What is the general concept/balancing act that represents the fundamental concept behind the field of finance? Illustrate with an example.
In our opinion, the general concept/balancing act that represents the fundamental concept behind the field of finance is as follows: the constrained optimization of allocating scarce resources, the consideration of the value of money (taking into account the factors of risks, temporal value of money, etc.) and the temporal arrangement of finance for the company.
Illustration with example:
For any firm, the most widely recognized scarce resource is money. When one decides to choose new projects for his firm from three available options, one might be able to pick ONLY one because the constraint of money. Which one should he choose? What should he consider to commence a smart move? He might have to trade off between many factors. For example, the strategic value of the option for the ongoing projects, the benefit for project synergism, etc. In one word, one should evaluate the profit he could gain for an overall financial map. What could represent the value of the project, and how do we know the value of it? Normally, we invest at first and, harvest later. It is relatively easy to measure the amount we invest, but far more difficult to accurately gauge the return in the future. Does the return of $1 million in one year equate to the $1 million in a hundred years? Of course not, because one hundred years later, none of us could enjoy the return. Moreover, the effects of inflation also play a part: today we could buy an apple for $1, one year later we might have to pay $2. When we get the $1million return in one year, we could re-invest the $1 million to profit more. If we get the $1 million return in ten years, we could get nothing, not to...