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Principles of Financial

Decision Making

Syed Abdul Rafey Qadri


April 17, 2015

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Suggested Ground Rules …
 Brainstorm freely; disagree openly, but courteously…
it stimulates discussion & helps others ‘think aloud’!
 Speak up, or you’ll be called upon to speak!
 Don’t take up more than your fair share of talk time
 Avoid side conversations, let all participants benefit!
 Keep discussions and comments relevant
 Don’t leave the room unless you have to
 Don’t interrupt
 Speak up with interesting & relevant ideas that will
add value
 Switch off cell phones!!!
 Others?

We Acknowledge use of Internet Sources in Preparation of this Presentation


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Why do we need to make Decision

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Availability of Options

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Basic Economic Principles - 1

 People choose because of limited


resources.
 People’s choices involve costs.
 People respond to incentives in
predictable ways.

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Basic Economic Principles - 2
 People create economic systems that
influence individual choices and
incentives.
 People gain when they trade
voluntarily
 People’s choices have consequences
that lie in the future
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Common Decision-Making Strategies

spontaneity
Choosing the first option that comes to mind; giving little or no
consideration to the consequences of the choice.

compliance
Going along with family, school, work, or peer expectations.

procrastination
Postponing thought and action until options are limited.

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Common Decision-Making Strategies
agonizing
Accumulating so much information that analyzing the options
becomes overwhelming.

intention
Choosing an option that will be both intellectually and
emotionally satisfying.

desire
Choosing the option that might achieve the best result,
regardless of the risk involved.
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Common Decision-Making Strategies

avoidance
Choosing the option that is most likely to avoid the worst
possible result.

security
Choosing the option that will bring some success, offend the
fewest people, and pose the least risk.

synthesis
Choosing the option that has a good chance to succeed and which
you like the best.
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T-Chart
Pros Cons

Using a T-chart to list pros and cons


related to decisions can help make the
decision making process simple.
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Choosing Brand Name Jeans Over No-
Name Jeans
Pros Cons

Better Fit Cost More

Popular people I will look just like


will notice me. everyone else.
Feel better I can only
about myself. afford one pair.
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Financial Tools
Time Value of Money
Cost Benefit Analysis
Total Cost of Ownership

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Time Value of Money

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Time Value of Money
Yesterday Today Tomorrow

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Present Value
Future Value

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Most Powerful Formula

Fv= Pv(1+i) n

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Cost Benefit Analysis

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Things NOT desired
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Total Cost of Ownership

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Total Cost – I.T. Project

Acquisition Costs Operating Costs Change Costs

Software Obvious costs Obvious costs Hidden costs

Hardware Obvious costs Obvious costs Hidden costs

Personnel Hidden costs Hidden costs Hidden costs

NW & Comm Hidden costs Hidden costs Hidden costs

Facilities Hidden costs Hidden costs Hidden costs

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TCO – I.T. (Server only)

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TCO
Proposed Business Incremental
3-Year Figures in 1,000s
Acquisition as Usual Differences
Total Cost of Ownership 14,256 17,258 (3,002)
Capital Expenses (CAPEX) 1,219 707 511
Operating Expenses (OPEX) 13,037 16,550 (3,513)
Net Cash Flow — — 2,981
Net Present Value @8% (NPV) — — 2,365
Internal Rate of Return (IRR) — — 121%
Return on Investment (ROI) — — 24.9%
Payback Period — — 7 months

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Internal
External

Controls
Internal
External

Controls
EXPERIENCES,
COMMENTS,
QUESTIONS.

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Syed Abdul Rafey Qadri
MBA, CIA, AM(ACAMS), EA(ACFE)
rafey.qadri@taaseer.net
(92 321) 3779015

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