Lesson 6 - MsArgos/RMI_2501_Fall_2026 GitHub Wiki

Read Chapter 4 and then answer:

If the past is 'sunk' and financial decisions can only be made about the future, how do you evaluate alternatives for financial goals?

See here you were randomly paired up with (answer it in the right place below and even if your partner is not cooperative. Do it alone if needed!)

Pair 1: The past being "sunk" means we can no longer have control over our decisions from that time, but we can make better financial decisions in the future by looking back at what we did then. A good example would be evaluating chance-based situations that you have experienced in your past; since these are independent events, it is impossible to control their outcomes, however that doesn't stop us from using what we know to figure out and try to understand their probabilities. Like if you had bet your annual disposable income of 500 dollars on the same sports team to win the last 10 years, and 2 out of 10 times they lost. From what you know, your expected value (equation) is looking like (0.2 x 1000) + (0.8 x -500) = -200 dollars. In this case, what we should focus on is what we have learned from our past decisions rather than simply putting the emphasis on the profit or loss, because you can evaluate that it is not in your favor to bet on the team winning this year. Moreover, the time value of money is one principle that we can use to evaluate alternatives. It tells us how time affects the liquidity of money and its values which would be useful for making future decisions. In addition to this, pro forma financial statements can explicitly show the consequences of our choices, like what is demonstrated earlier, which can be utilized to avoid making poor financial decisions in the future. It is important to look at multiple ways of bringing in cash flows, as relying on independent events to go your way every time, especially with a history of not, isn't going to be the most sustainable. If you take the 10 years you spent betting 500 dollars on your favorite team, and instead spent 10 years putting that into, for example, a savings account with an interest rate of 5%, and 500 dollar annual annuities, you would be left with 7,103.39 dollars by the end. Now compare that to your expected 10 year turnout of -200 dollars, you can see why this might be a better alternative for how to spend your disposable income over the next decade. It's so important to go into this much detail because there is really no other way to grasp what your different options do for you in your future. At the same time it's also important to consider the liquidity of your cashflow as depending on your situation, that can be a liability. Money may have more value liquid if there is an opportunity cost to convert access it, but if there is no opportunity cost, it has a higher possible value if you do something like invest/put it into a savings account as we did above.

Pair 2:

Cash flows are the money coming in or the money going out. When past costs are sunk, it isn’t possible to change what already happened, therefore they cannot determine any future financial decisions. The only way to decide what to do next is to focus on the future.

These alternatives show that financial making decision should not be evaluated by only the immediate results. We need to concern future cash flow, opportunity costs, and the risk of each choice. For example, it may lose opportunity to use extra money for saving or investing by repaying money for debt with it, while it is possible to reduce future interests by repaying early.Therefore, comparing both benefits and costs caused by passage of time.

For instance, imagine that we are 100 000$ in debt because of student loans, and the only way to pay everything back is within these pro forma financial statements. We could consider different alternatives. The first option is that we can keep paying the debt normally with our annuity. This option would take longer but it has less uncertainty. We also need to take into account that time affects the value of money, since 100$ today is not going to be 100$ in a few years. The second option would be to take a second job and use that money in order to pay the debt. It would be a faster way to pay the debt, but the opportunity cost of this option would be the time we give up by working more. The third option could be deciding to gamble away the debt, but the risk of doing so is much higher because we could either win or lose, and end up in a higher debt.

To make these decisions, it’s important to know what exactly will be impacted and to what extent. We need to analyse the cash flow of each option and adjust them for the time-value of money. We also need to look at the risks involved, like the annuity being safer or riskier. Then, we should look at the benefits and the costs of these decisions, and after we should compare all the alternatives within these options to make the final decision that will benefit us in the future.

In addition, we should consider not only how much money is involved, but also when cash flow will occur because the value of money may change over time, thus each alternatives change their value depending on when future income and costs occur. By thinking these elements together, we can better understand possible future results of each choice and evaluate which alternatives are appropriate for own financial goals.

Pair 3:

Since the past cannot be changed, I think we can use past information to understand our financial situation, but our decision should focus on the possible future results of each alternative. Since the past cost are sunk because they have alredy happened and cannot be recovered, so they should not determine which alternative we choose for the future. To evaluate the alternatives, we can project how each choice may affect our future income, cash flow, debt and compare with our financial goal. For example, if my financial goal is to reduce my debt, I may have two alternatives, continue my current repayment plan or use extra income to pay the debt faster. Paying the debt faster may reduce my future interest expenses and increase my future free cash flow, But the opportunity cost is that I cannot use that extra money for saving or investment. So I can compare the future result of these two choices and decide which one better helps me reach my goal

This focus on future outcomes is especially important when a financial plan does not work as expected. even if a financial plan fails, we cannot change the past, so we should focus on the future and think carefully about the next steps. We can do the decision just for the future. Although we can make prediction about future, we cannot know what exactly what will happen. Therefore, before making a financial decision we need to spend time for thinking about and predicting the future. For example, we need to consider how much risk and uncertainty there are, how much the opportunity cost is, and whether the potential outcome is worth the risk. Considering these factors can help us make better financial decision for the future

Pair 4:

Why the past is 'sunk'? Cash flows in the past cannot be changed, and that is why the past is sunk.

How to evaluate alternatives for financial goals? To evaluate alternatives for financial goals, there are five steps. First, we need to understand liquidity of wealth and opportunity cost. We need to think about other choices or benefits. It is important to understand what we should give up from this decision. Second, we should consider the value of future cash flow. The textbook explains that time creates distance between the present and future, and this distance can creates both benefit and cost. Third, evaluating several cash flows helps us to evaluate our financial decision. For example, we will face savings, loans, and annuities. We cannot ignore the step considering the effect of financial statements by the decision. Those statements show us the summary of outcome of our financial decisions. In the end, we should consider the risk. Because as I mentioned earlier, there is a distance from now to the future, and the situation could change as the time passing.

Pair 5: If the past is sunk, we should focus on the possible future outcomes of each financial decision instead of worrying about money that has already been spent. Past decisions can still be useful because it can help us understand our current financial situation and make better predictions. When evaluating alternatives for financial goals, it is important to compare the choices that will matter in the future rather than focusing on money that has already been spent. For example, if I have 100,000 yen and I am deciding whether to spend it on a new phone or save it for tuition, I would compare the benefits of both choices. The phone gives me an immediate benefit, but saving the money could help me cover an important future expense and avoid borrowing money later. I would also consider how each choice affects my other opportunities and whether it brings me closer to my financial goals. I would also consider the time value of money because the value can change depending on when I use it. However, there is also uncertainty because future expenses or income, or other situations, could change.

Pair 6:

Not every expensive decision is automatically a mistake, and not every past expenditure implies that you must change course later on. In the past, I bought an expensive car and spent a lot of my money on it. Today, I could question that decision and consider whether to keep the car or to sell it. But, I cannot alter the original purchase price or the costs already incurred. These are sunk and therefore should not be the sole factors determining my decision today. To evaluate both alternatives, I must compare their future consequences. If I keep the car, I will continue to pay costs for fuel, insurance, servicing, and potential repairs. Selling it, on the other hand, would free up money for saving or investing. These represent my opportunity costs of keeping the vehicle. For me, however, money is not the only deciding factor. My car also holds a personal value for me, and it continues to serve its purpose. At the same time, the running costs are manageable for me. I own the car yet still have sufficient liquidity to invest, cover personal expenses, and pursue my other financial goals. Consequently, I do not currently plan to sell the car. Of course, that could change in the future, but right now, it does not prevent me from achieving my financial goals.

Even if I feel regret about something that is already sunk, there is nothing I can do to change the past. It is already over, and we need to move on to the next step, where we can make choices and have many options for the future. That is why we need to think about financial planning for the future. Thinking about 5 or 10 years life plan is important for everyone because we have no idea what risks we may face, such as health issues, accidents, and financial collapse. I am currently job hunting, but it is really important to think about my future beyond 10 years and to tell human resources what my future plans are. In this textbook, I became curious about the concept of "Time Value of Money." This means that liquidity has value. Liquidity refers to how easily and quickly an asset can be converted into cash. If we become seriously ill and need money as soon as possible, we can use liquid assets such as cash, which is convenient. That is why we need to have liquid assets. We can make choices about whether to keep our money liquid or not based on our current needs. However, when our liquidity and choices are separated by time, there is an opportunity cost. We can estimate future outcomes by forecasting income and expenses. Companies can also see how their financial situation may change when they make certain financial decisions. This is called pro forma financial statements, which are necessary for making financial projections about the future. I think I need to do more financial planning in the future because I tend to spend money quickly without thinking about the future. I feel that experiences in the present are really important, but I also need to think about the future because I really want to study abroad.

Pair 7:

Although the past is "sunk" and cannot be changed, past financial information is still useful for making future plans. Financial statements and past trends can help us understand our current financial situation and make reasonable predictions about the future. A perfect example of how to use past information to determine your future financial situation is when you have a loan or an account with interest. You can use the information about those accounts to calculate their future value, which allows you to choose a financial pathway and figure out your best options going forward.

To evaluate alternatives for financial goals, we should compare the possible future consequences of each choice. We need to consider future cash flows, the time value of money, opportunity costs, and risk. Money received sooner generally has more value because waiting creates opportunity costs and uncertainty. Therefore, present value and future value can help us compare the value of different alternatives over time.

We can also use pro forma financial statements to project how each alternative may affect future income, cash flow, and net worth. Past information about assets can also help us predict how their value may change in the future through appreciation or depreciation. For example, we do not need to personally buy a new car to know whether a car will retain its value and for how long. We can look at information sources such as Kelley Blue Book to look at past depreciation and estimate how much value a car may lose over time. When an alternative involves uncertainty, probabilities and expected value can be used to measure and compare its possible outcomes. Therefore, although the past cannot be changed, it provides useful information for planning. We evaluate financial alternatives by comparing their expected future outcomes, value, costs, and risks, and by considering how each choice can help us achieve our financial goals.

Pair 8: The “sunk” past decisions is important to understand while making future decisions. While “sunk” has negative connotations, the past provides important crucial information to make future decisions even if the money is already gone. Reflection on past trends, outcome of decisions, and understanding the past can help make informed financial decisions. For example, looking at past investment decisions, using increased income as a financial goal, changing or maintaining the investment can help reach the goal. Apart from this very direct use of the information provided by observing the “sunk” past, looking at economy trends, it can be helpful to understand how well your income can sustain your expenses. Furthermore, economic trends like inflation rate, and any appreciation or depreciation in the value of assets, can help understand how to manage transaction to maximize profit and maintain value of your income. Nevertheless, evaluating future decisions like understanding it's opportunity cost, predicting future trends is essential to make informed future decisions to achieve financial goal. However, even if simple cost and benefit analysis is done for any current financial decision, like whether to save or spend some earned money, the past decisions play a big role in coming to a decision, like how much money have you already spent? do you have any bills that you have not paid? Is the market favouring investments? and many more such questions. Thus, it can be understood that even though the past is "sunk" it is not obsolete, where it can be used to derive alternate options, based on the outcome of the previous decisions, to optimize the profit margin and create the desired residual income, while implementing analytical strategies, to understand importance of decisions and future trends can help to evaluate the decision in the direction to achieve the financial goal.

Pair 9: The past is 'sunk' because, simply, we cannot undo anything that has already been done. This, for instance, means that we can never change anything about the money that we have already spent. Thus, it should not affect our financial decisions regarding the future. To make the most of the decisions that are yet to be made, firstly we should be aware of our own financial goals, and then we should carefully pay attention to the future cash flows, along with considering the time value of the money, which creates opportunity costs and risks. As a common example in our daily life situation, say you want to buy a vinyl record of your favorite singer. If you buy the vinyl now, you would enjoy it by listening to it or just simply as a new addition to your collection, and the cost would be the current price of it. However, in the case you decide not to get it, you would be able to spend the money elsewhere or invest it to make it grow, which can benefit you. The opportunity costs would be the potential goods that you could have gotten with the same amount of money or the profit you could have made with it. Or if you decide to wait until you buy it, the price may change, whether it goes up or down or stays the same. What are the alternative options? You could listen to the same songs on YouTube for free. What about the risks of not getting it? It might sell out and if you want it in the future, you might have to pay much higher price. But if you buy it now and it becomes a premiere price, it would be an asset for you. So, like this, we need to evaluate the possible options by in order to make a reasonable enough decision for our lives, by taking multiple factors into consideration.

Note: Each pair will need to have a volunteer to share with everyone early in class which of the nine responses was the best and why.