The Most Viable Option for Investing - Essay Example

Financial report Summary The purpose of this financial report is to present the basis by which the decision to invest 2 billion on education, compared to bailing out banks was reached. Having been granted a task to present to the minister for finance the best and the most viable option for investing 2 billion, with an option to either invest the money in the education or the banking sector, we embarked on applying mathematical models to reach at the most viable option. Notwithstanding the fact that both options were promising, there was a need to engage in complete evaluation of the viability of the investments, based on the future predictions of the benefits obtainable from such investments. 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, 50 countries were used to apply these tests, while using variables such as the GDP per capita, the inflation rates, the consumer price index and the secondary schools to modify the mathematical models and reach at a conclusive decision on the most promising investment opportunity 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 investing the 2 billion in secondary school education was more promising than investing the same in the banking sector, where the money could have been used to bail out the banks. 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 the most viable investment option, between investing 2 billion in secondary education on one hand, and investing the same in the financial, sector where the money could be used to bail out banks, on the other hand. 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 “how to help the Minister of Finance on how to invest 2 billion.” The options presented were either to invest the money in secondary education, or invest the same in the financial sector, to bail out the banks. Both options presented financial benefits to the country in the long run. However, the benefits obtainable needed to be quantified, to come up with a final decision regarding the most promising and viable option of investing the money. When banks advance credits to customers, their ability to reinvest the resources and create more wealth for the country, through increasing the taxes payable and the shareholders value, is reduced (Narayanan & Nanda, 2004 p65). Therefore, advancing loans to banks and thus bailing them out is economically beneficial, since it can assist in increasing the financial muscles of the banks. This will enable them to invest more in the economy, through advancing loans to their customers at some interest rates, while also investing such resources in other viable and profitable areas such as the stock markets (Batyrshin, 2007 p25). Such investments helps the banks to generate more revenues, and thus pay the governments more taxes, while at the same time stimulating economic growth and welfare, through creating employment opportunities for the people, as the banks grow and expand their operations. Therefore, bailing out banks would be a major step towards ensuring the stimulation of economic growth and increment of the welfare of the people, through the creation of employment opportunities, which will increase household incomes and the consequent purchasing power of such households (Ingersoll, 1987 p52). However, 2 billion could only be applied towards bailing the credit of few banks, owing to the nature of credits that banks have. Therefore, the 2 billion could fail to make a great economic impact, when invested in the banking sector. Investing the same resources in the education sector is yet another viable option. This is because, through helping secondary school students attain education, the country will be preparing the future work force, which is capable of generating more incomes and stimulating GDP per capita growth for the country in the future (Narayanan & Nanda, 2004 p56). The benefit obtainable from investing the resources in secondary school education is the fact that, 2 billion is sufficient to impact on a large group of people, who are the future labor force of a country. Therefore, investing the 2 billion in secondary education will have the effect of preparing more people for future income generation, which will increase the standards of living of the people and increase the purchasing power of the households, thus stimulating higher contribution of the people to GDP growth (Batyrshin, 2007 p29). However, the problem with this investment opportunity is that, it is future oriented, and therefore not capable of making an immediate impact as would happen when the resources are invested in the banks. Nevertheless, the major advantages with investing the resources in secondary education is the fact that there are few risks involved, compared to investing in the banks. Additionally, the contribution of the workforce to GDP per capita, developed through secondary education will be great compared to the contribution made by the banks (Narayanan & Nanda, 2004 p71). Therefore, after we re-specified and re-estimated the model, we found out that the right decision was to spend the 2 billion on secondary education rather than bailing out the banks. Therefore, it is more viable to spend the 2 billion on secondary education, to increase the GDP per capita. 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. 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