3.3 Decision Making Techniques Flashcards
Limitations of Time Series Analysis
Relies on past figures continuing to happen
In high tech markets change happens rapidly and products have a short life cycle
Time consuming and complex
Doesn’t take into account how recent the data is
Doesn’t link with corporate objectives
What is time series analysis used for?
To predict future sales, revenue or other elements based on trends observed over a period of time
Use of decision trees
A business can’t afford to follow every option so it may use a decision tree to analyse the probability of a success in a choice of strategies. Done for:
New product launch
A new marketing campaign on the current product
Relocation to a new building
What is a decision tree?
Graphical representation of alternative choices that can be made by a business which enable the decision maker suitable option in a particular circumstance.
Places a numerical value on likely or potential outcomes
Advantages of a decision tree
They can be useful for operational decision making
Enables effective use of back data
Probabilities allows flexibility
Scientific/Objective analysis to decision making
Encourages clear thinking and planning
Disadvantages of decision trees
Reliant on accuracy of data used
Probabilities are only estimated
Real time data problems
Critical Path analysis
Identify which activities are critical to not slow down the project and which activities can be delayed without delaying the project
Investment Appraisal
Techniques to determine if the investment is likely to be profitable
Simple payback- Payback period
Refers to the time taken for an investment to reach the break even point
Benefits of Simple Payback
Simple and easy to calculate
Focus on cash flow
Emphesis on speed of return, may be appropriate for business subject to market change
Straightforward to compare projects
Drawbacks of Simple Payback
Takes no account of the time value of money
Encourages short term thinking
Average rate of return
Total accounting return for a project to see if it meets the target return
Benefits of ARR
Provides a percentage return which will be compared to a target return
ARR looks at profitability of the project
Key for shareholders- profit
Drawbacks of ARR
Doesn’t take into account cash flows- only profit
Takes no account of time value of money
Net present Value
Calculates the monetary value now, of the project’s future value
