3.3 Flashcards
Limitations of quantitative sales forecasting?
- Relatively short-term (data loses value after 1-2 years)
- Dependent on the quality of the market research
- Less valuable in volatile markets
- Prior data has little bearing on what will happen in the future
- Sales forecasts are unlikely to take into account external shocks in the future such as economic recession
When may investment appraisal be used?
To aid making decisions when investing in:
- non-current assets
- launching new products
- new technology
- expansion
- infrastructure
What factors may a business consider when making investment decisions?
Financial:
- The rate of interest - using current rate of interest as a benchmark to judge investments against
- ROCE - is there an expected minimum %return on the investment?
- Cost - can the firm finance the investment?
Non-financial:
- Corporate objectives - does the business investment support business strategy?
- Ethics - does the investment support CSR policy?
- Industrial relations - what will be the impact on employees?
What are possible risk factors in an investment?
- Timescale of the investment
- Knowledge/expertise of the business in the investment
- If the investment is in a new market
- Stability of the external environment (PESTLE)
What is sensitivity analysis and examples?
Involves using variations in forecasting to allow for a range of outcomes.
Allows a business to ask ‘what if’ questions and put in place plans to deal with these scenarios
E.g.
- comparing NPV using a variety of discount factors
- allowing for a 20% fluctuation in sales and costs
- building in contingency for unforeseen expenses
Limitations of methods of investment?
Payback - cash earned after payback ignored, profitability overlooked
ARR - effects of time value on money ignored
NPV - calculation is more complex, if rate of discount is too high, projects will not be profitable
What is the purpose of a decision tree? When may it be used?
To place an expected financial or different decision based on the probability of an event occurring
- new product launch
- new marketing campaign
- relocation to a new building
What are the influences on decision-making?
- the objectives and mission of the business
- ethics - using a ‘moral compass’ to guide decisions
- the level of risk involved - some managers and businesses are more risk averse than others
- the external environment (most decision-making models do not take these factors into account)
- resource constraints - a business can only make decisions if it has the resources available - this is where opportunity cost comes in
Eval of decision trees?
:) Clarifies possible courses of action
:) Adds financial data to decisions
:) Makes managers account for risk
:) Especially useful where similar scenarios have occurred before so that good estimates for probabilities are used
:) Quantitative approach quicker to complete
:( Probabilities are over-estimated
:( Does not consider qualitative information
:( Does not take into account dynamic nature of the business
:( Less useful in the case of new problems
:( Managers could manipulate data
Benefits of critical path analysis?
:) Identify the exact activities involved in implementing a strategy
:) Effectively plan for the implementation of a strategy
:) Introduce informed deadlines for different activities
:) Allocate resources efficiently to the different activities
:) Identify float time and those activities that are critical to the success of the strategy
Drawbacks of critical path analysis?
:( Projects and strategies often involve multiple factors, agents and stakeholders - calculating the time taken to complete an activity can be very difficult
:( Does not take into account qualitative issues such as employee morale or relationships between workers
:( Relies on estimations - strategies not implemented on time if ESTs and LFTs are incorrect
:( Does not take into account unexpected events and significant external factors beyond the businesses control e.g. key staff on long-term a sense
