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CMA Foundation · Fundamentals of Business Economics and Management · Decision-making - Types and Process

Sharma Traders invests surplus cash in a bank fixed deposit that pays a guaranteed 7% per annum for one year. Which decision-making condition best describes this choice?

The choice is made under certainty, since the fixed deposit gives a guaranteed 7% return and the outcome is known at the time of deciding. Later changes in market interest rates do not alter this deposit, so the situation is neither risky nor uncertain.

  1. ARisk, because interest rates may change later
  2. BUncertainty, because the future is always unknown
  3. CCertainty, because the outcome of the alternative is known in advanceCorrect
  4. DConflict, because the bank and the firm have opposing aims

Explanation

A guaranteed return means the result of the alternative is known exactly when the decision is made. That is the definition of decision-making under certainty. Possible future rate changes do not affect a deposit already fixed at 7%, so risk is not the right description.

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