Investing in the Free-Enterprise System Economics: Chapter 10.1 Investing in the Free-Enterprise System

Learning Target: Students will learn about the factors companies evaluate when deciding whether to obtain financing for expansion.

Success Criteria: Students will be able to explain how businesses make the decision to expand. Students will be able to describe the different ways people can invest their savings. Students will be able to analyze the role investments play in increasing productivity.

Financing Financing - Obtaining funds or money capital for business expansion. Financing business operations and growth is an integral part of our free-enterprise system. People save their money in one of the ways we discussed in chapter 6 (personal savings account, asking friends/family, and then these deposits become available.

When To Expand Business owners must decide if they have enough funds to expand and if its beneficial to expand. To help business owners make this decision they create a cost-benefit analysis.

Cost-Benefit Analysis Cost-benefit analysis - A financial process in which a business estimates the cost of any action and compares it with the estimated benefits of that action. Pg. 261 Figure 10.1

Cost-Benefit Analysis Revenues – Total income from sales of output. Profits – The amount earned after a business subtracts its costs from its revenues.

Five Steps of Cost-Benefit Analysis 1. Estimate the costs of expansion. 2. Calculate expected revenues. 3. Calculate expected profits. 4. Calculate cost of loan plus interest. 5. Expected profits should outweigh the costs of production.

Cost-Benefit Analysis Examples of costs: Renting new stores Training new workers New taxes Opportunity costs of more time spent working Additional inventory Utilities

Cost-Benefit Analysis Example: You can borrow $1 million to finance your business expansion. Your bank will charge you 10% per year for the loan. That equals to $100,000 per year. Your expansion generates profits of $200,000 per year. Your choice of borrowing $1 million was a good one.

Success Criteria: Students will be able to explain how businesses make the decision to expand. Students will be able to describe the different ways people can invest their savings. Students will be able to analyze the role investments play in increasing productivity.

Why Finance Investments Businesses are interested in obtaining financing so that they can expand and make higher profits in the future. Savers unintentionally finance business growth when they deposit funds in a savings account or a CD. For those who intentionally finance investment their reward is the interest on a bond or dividends from the stock in the company.

Why Finance Investments When one business succeeds at obtaining financing it uses funds that might have helped another business. In a market economy each business competes for scarce financial resources. Businesses can borrow from banks, finance companies, or other institutions.

Success Criteria: Students will be able to explain how businesses make the decision to expand. Students will be able to describe the different ways people can invest their savings. Students will be able to analyze the role investments play in increasing productivity.

Rally Robin 1. Define financing, cost-benefit analysis, revenues, and profits. 2. What is the difference between profit and revenue? 3. Name two ways people who finance a business can obtain profits.

Cost-Benefit Analysis All Write Round Robin Create a web diagram one below to list the steps involved in cost-benefit analysis. Cost-Benefit Analysis a