Hard Financial Investments - Essay Example

Financial report Summary The purpose of this financial report is to determine whether CORVETTE Company, which is a sport car selling company, should agree to an offer granted by a bank, to pay a sure sum of $2,150,000 which is risk-averse, at the expense of taking the risks involved in selling the cars to customers worldwide, using local currencies. Having been confronted by such a financial decision making scenario, with an option to either continue with its business of selling luxurious cars to its customers worldwide or accept the sure sum offered by the bank and cease its business, the company has to assess the risks and the benefits associated with either of the options, and then decide which option between the two is most credible and stick with it. Notwithstanding the fact that both options were promising, there was a need to engage in complete evaluation of the viability of the options, based on the future predictions of the benefits obtainable from such options. The process of determining the viable option entailed the application of mathematical techniques and models such as the regression analysis, the LM test and the decision rule to arrive at the most promising and viable investment option. Therefore, variables such as the GDP per capita, the inflation rates, and the consumer price index were used to modify the mathematical models and reach at a conclusive decision on the most promising option that could be adopted. After the application of the mathematical models and the modification of these models with the above mentioned variable, a decision was reached that the option to receive the sure sum offered by the bank was not plausible, and so the decision was to reject the offer Introduction Financial decisions are among the most difficult decisions to reach. This because, while making a financial decision, varied considerations should d be made, which call for a greater level of accuracy and precise estimations (Ingersoll, 1987 p47). Additionally, financial decisions are not hundred percent dependable, owing to the large number of factors that affect financial investments and savings. Most significant is the fact that the complexity of making financial decisions is added to, by the nature of the risks involved in the financial sector, where a slight mistake either in prediction or estimation could mean the success or failure of the investments made (Batyrshin, 2007 p23). Therefore, it is extremely important to ensure that financial decisions are reached with the highest degree of precision possible, while at the same time putting into consideration all the factors that determine the viability of the decisions. This financial report presents the considerations that were made to determine whether CORVETTE Company should accept a sure sum of sum of $2,150,000 which is risk-averse, granted by a bank, at the expense of continuing with its business of selling cars to its customers worldwide, using a local currency, or it should reject the offer. Therefore, all the considerations that were made, courtesy of the mathematical models applied will be discussed, and the final decision that was made presented. Discussion The task required that we carry out a research on whether CORVETTE Company should accept a sure sum of sum of $2,150,000 granted by a bank, at the expense of continuing with its business of selling cars to its customers worldwide, using a local currency. The need to reach this decision was based on the fact that CORVETTE Company could receive the sure sum that was risk-averse, or reject the amount and continue taking the risks associated with selling cars to customers worldwide using a local currency. Both options presented financial benefits to the company. However, the benefits obtainable needed to be quantified, to come up with a final decision regarding the most promising and viable option. When banks advance credits to customers, they do so with an intention of making profits (Narayanan & Nanda, 2004 p65). Therefore, while granting CORVETTE Company a sure sum of $2,150,000, the bank is aiming at making reaping some economic benefits (Batyrshin, 2007 p25). Using the mathematical models and techniques to quantify the benefit expected by the bank, it was observed that the bank’s Value-at-Risk is 49990.51$, while the bank’s expected profit is 25398.05 $. Therefore, the deal is beneficial to the bank since it could earn some profit, and also beneficial to CORVETTE Company, since it could obtain $2,150,000 that was risk-averse. Continuing with the business of selling car is yet another viable option for CORVETTE Company. This is because, though there are some risks involved in undertaking the business, the business is capable of generating more incomes (Ingersoll, 1987 p52). The benefit obtainable was quantified, and the result indicated that the probability that the revenue will be less than 2,150,000 is 29.12%. This is a sure indication that if the company opted to take the risks and continue with its business, at the expense of accepting the sure sum offered by the bank, the probability that the return will be equal to or over 2,150,000 is nearly 71%, to be precise 70.88%. This shows that there is a high chance of CORVETTE Company earning more income from continuing with the business, than the amount it could receive from the bank. Therefore, after re-specifying and re-estimating the model, it was found out that the right decision was to reject the offer of a sure sum of sum of $2,150,000 offered by the bank, and continue taking the risks involved in continue selling the cars, since even though there are some risks involved, there are higher chances of generating a higher income, than the one which was offered by the bank. Conclusion Financial investment decisions are hard to make. The factors considered and the nature of the risks involved, coupled with the nature of financial uncertainties, makes the process of making a financial decision even more complex. However, with the use of mathematical models and techniques, it is possible to reach a conclusive, dependable and promising investment decision, which could seem inappropriate while assessed without quantifying the benefits. References Batyrshin, I. Z. (2007). Perception-based data mining and decision making in economics and finance. Berlin, Springer. Ingersoll, J. E. (1987). Theory of financial decision making. Totowa, N.J., Rowman & Littlefield. Narayanan, M. P., & Nanda, V. (2004). Finance for strategic decision making what non-financial managers need to know. San Francisco, Jossey-Bass. Read More