3.3 Decision-making techniques

Question 1

Name 4 things sales forecasting helps with in business planning

Answer 1

-HR plan: HR department considers s.f. to ensure right no. of staff with right skills are employed

-cash flow forecast : to estimate cash inflows, & outflows, cash flow forectasts have to be based on s.f

-profit forecasts & budgets: s.f used to plan how much firm is expecting to make in rev & profit -> companies then know how much they are able to spend

-production planning: working backwards frm s.f. allows a business to ensure enough products are brought -> to satsfy demand

Question 2

What is a moving average

Answer 2

quantitive method used to identify underlying trends in set of raw data

Question 3

What does forecasting sales using extrapolation mean

Answer 3

assuming past trends will continue

Question 4

What is correlation

Answer 4

relationship between two sets of variables.

Question 5

Name 2 limitations of quantitive forecasting techniques

Answer 5

-future may not be like past -> external factors changing- impact sales, unpredictable

-quality of a forecast is reliant on the ability of the forecast to interpret data being used to generate forecast

Question 6

Name the 3 methods of investment appraisal

Answer 6

-payback period

-average rate of return

-net present value

Question 7

What is investment appraisal

Answer 7

process of using cash flows to assess financial attractiveness of an investment decision

Question 8

What is the payback period

Answer 8

assessing period of time a business must wait until initial investment has been recovered

-quicker paybacks are best -> as once paybacks occurred a firm isn’t losing money on its investment

Question 9

Give the formula for payback

Answer 9

outlay outstanding/ montly cash flow in year of payback

Question 10

What is average rate of return (ARR)

Answer 10

considers profit generated by an investment

-higher the ARR the higher the more profitable the investment

Question 11

Give the formula for average rate of return

Answer 11

average annual profit/ initial outlay x100

Question 12

What is net present cash flow

Answer 12

It calculates the monetary value now of a projects future cash flows

Question 13

Give the formula for present value

Answer 13

cash flow x discount factor

Question 14

Name 3 strengths and weakness of payback method

Answer 14

+easy to calculate
+takes into account timing of cash flows
+useful for businesses with weak cash flows

-tells us nothing about profitability
-may encourage short-termist attitude
-ignpres what happens after payback is achieved

Question 15

Name 3 strengths and weakness of average rate of return method

Answer 15

+clear focus on profitability
+considers cash flows over whole projects lifetime
+easy to compare with other measures of return

Question 16

Name 3 strengths and weakness of net present value method

Question 17

What is time series data

Answer 17

series of figures covering an extended period of time

-allows business to predict future from past figures

Question 18

What is extrapolation

Answer 18

predicting future trends by projecting past trends

Question 19

What would be the NPV if:

cash flow = £20,000
discount factor = 0.9

Answer 19

20,000 x 0.9 = £18,000

-tells us the value of the cash now discounted from future

Question 20

How do you calculate net present value

Answer 20

calculate all present values (cf x df)

add together all the present values

Question 21

What does a positive net present value show

Answer 21

shows project generates a greater return on its initial investment

Question 22

What is a decision tree

Answer 22

a diagram showing the options & possible outcomes involved in making a decision

-as well as the probability of the outcomes occuring

Question 23

Explain the two branches shown in a decision tree

-a square
-a circle

Answer 23

square: a decision to be made

circle: chance events beyond firms control -> include probability

Question 24

What is expected value

Answer 24

average outcome expected knowing a chance event

Question 25

Name 3 advantages of using decision trees

Answer 25

+technique allows for uncertainty
+managers consider all options
+problems are set out clearly

Question 26

Name 2 disadvantages of decision trees

Answer 26

-gathering data required is hard
-bias -> estimations of probabilities & outcomes

Question 27

What is critical path analysis

Answer 27

technique used to plan most time-efficient way to complete complex projects

Question 28

What is the Earliest Start Time of an activity

Answer 28

earliest possible date which its possible to begin an activity

Question 29

What is the latest finish time for an activity

Answer 29

latest possible date an activity must be complete to prevent delaying project

Question 30

What is float time

Answer 30

any slack time avaliable attached to an acitivty

Question 31

Give the float time calculation

Answer 31

LFT - duration - EST

Question 32

What is the critical path

Answer 32

the sequence of activities

Question 33

Why is critical path analysis useful for a business

Answer 33

-if firms are launching new product -> may be in a rush to get it to market -> incase of competitiors -> if there the first firm to get project completed -> ^ market share -> ^ sales -> establish customer loyalty -> set prices in market

Question 34

Name 3 benefits of critical path analysis

Question 35

Name 3 limitations of critical path analysis