# Decision-Making Techniques 3.3 Flashcards

what are the four main methods used to provide a quantitative sales forecast?

- moving averages
- extrapolation
- correlation
- test market

what are the two main circumstances where moving averages are helpful?

- where there are strong seasonal influences on sales

2. where sales are erratic for no obvious reason

Describe how to find moving averages:

- calculate the moving total (usually a three month total e.g. jan, feb and march, and then feb, march and April)
- The second column has the total of the three months (centred average) is divided by three to make the centred three month average, and centred back to February

what is forecasting using extrapolation?

It is the simplest was to predict the future - just using previous values, so on a graph you continue the line that was previously there. You must still ensure that the graph makes sense for it to continue up, for example ice creams in bad weather are likely to not go up.

what is the table which uses correlation called?

a scatter graph

what are 6 limitations of quantitative sales forecasting techniques?

- new entrants into the market
- a sudden wave of viral, social media support or criticism of the product or celebrity promoting the products
- population changes
- changes in weather conditions
- legal changes
- internal factors - changes in sales force, changes in the amount of spending on promotion our way the product is being spent

what is the definition of a sales forecast?

a method of predicting future sales using statistical methods

what is the definition of seasonal variation?

change in the value of a variable that is related to the seasons

what is the definition of a trend?

the general path a series of values follows over time, disregarding variations or random fluctuations

what are the three types of investment appraisal?

- payback period
- average rate of return
- net present value (NPV)

what are 5 reasons that a business should invest?

- demand for business/ product
- lower levels of risk
- amount of rewards
- reputation improvement
- enough finance to fund the investment

what are 4 advantages of payback period (IA method):

- useful to decide between two options as its straightforward to compare
- simple and easy to calculate and easy to understand the results
- focuses on cash flows
- good for future planning as it gives you a timeline for what could happen

what are 4 disadvantages of payback period (IA method):

- doesn’t take into consideration other unexpected events
- it will only be a forecast/ prediction
- it doesn’t look at the long term after the payback has been reached
- ignores qualitative aspects of a decision (opinion/ if anything changes)

what is the definition of payback?

the time it takes for a project to repay its initial investment

what is the average rate of return?

The percentage return on the investment made

what is the formula for the average rate of return?

(average annual profit/ initial investment) x100

what is the formula for average annual profit?

profit for the period/ years

do you want the average annual profit to be as high as possible or as low as possible?

as high as possible

When working out the average rate of return, and you are given the net cash flow, not the profit, what do you do?

times the net cash flow by the years and minus the initial investment

what is the definition of net present value/ discounted cash flow?

the value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest

what is the other name for net present value?

discounted cash flow

what is net present value?

the difference between the present value of cash inflows and the value of cash outflows

what is investment appraisal?

its the process of analysing whether investment projects are worthwhile

what happens if a NPV value is positive/ negative?

- NPV is positive then the project can be invested in

- NPV is negative then the project will be avoided/ rejected

what is the calculation for a payback period?

sum invested/ net cash per time period

what is the interpretation of payback period?

its the length of time the money is at risk. Every business should want as short a payback period as possible

what are the three steps in calculating ARR?

- calculate the total profit over the lifetime of the investment ( total net cash flows minus the investment outlay)
- divide by the number of years of the investment project to give the average annual profit
- apply the formula

to discount a future cash flow, what is it necessary to know? (NPV)

- how many years into the future we are looking, since the greater the length of time involved, the smaller the present or discounted value of money will be
- what the prevailing rate of interest is likely to be