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What would you do?

Francois realized months ago that his company, ACME Hat Rack (ACME), needed to make significant changes to stay in business. Sales of hat racks from imitation deer antlers appeared solid on paper. But Francois could hear a demographic time-bomb ticking.  The young adult market had left hats behind, and with them, hat racks.

Francois made numerous presentations to senior management on new product concepts, market studies, and extensive competitive analysis. At the end of each presentation, he cautioned that if the company didn't move soon, their competitors would beat them to it. Finally, senior management said: "We need to understand the bottom line. Give us some projections." Projections? He wasn't a fortuneteller; how could he confidently predict how much money they would make at some future date? What would you do?

Francois might begin by performing a cost/benefit analysis. A cost/benefit analysis identifies, over a given time frame, the costs and benefits of a new business opportunity and then compares those figures to see if the opportunity makes economic sense. Once Francois has performed the cost/benefit analysis, he can further evaluate the situation by using one or more of the following analytical tools: return on investment (ROI), payback period, breakeven analysis, net present value (NPV), and sensitivity analysis. The information, or projections, that Francois gathers will help senior management understand the bottom line and determine whether the company should target the young adult market with new products.

In this topic, you will gain a basic understanding of key financial concepts and learn to perform financial analysis tasks such as budgeting, justifying investments, and monitoring financial performance over time.

How can managers determine which projects to invest in, and which to avoid? How can they monitor the financial health of the company?

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