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Business Theme 3 > 3.3 > Flashcards

3.3 Flashcards

1
Q

Why does a business need or want to forecast sales?

A 
Quantitative sales forecasting is a vital and common business planning activity
- forms basis for:
• HR plans
• Production 
• Cash flow forecast 
• Profit forecasts and budgets
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2
Q

What is extrapolation?

A

Use of trends established by historical data to make predictions about future values

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3
Q

Basic assumption of expltrapation

A

That the trend will continue into the future unless evidence suggest other wise

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4
Q

Moving averages

A

a+b+c
———-
3

b+c+d
————-
3

Etc

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5
Q

What is volatile data?

A

See trends more easily

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6
Q

Purpose of moving average

A

Helps point out the growth trend (expresses as a percentage growth rate)

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7
Q

Benefits of extrapolation

A
  • simple method of forecasting
  • not much data required
  • quick and cheap
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8
Q

Drawbacks of extrapolation

A
  • unreliable if there are significant fluctuations in historical data
  • assumes past trend will continue into the future
  • ignores qualitative factors (e.g change in tastes)
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9
Q

investment appraisal overview

A

Spending now with the expectation of a return in the future e.g new machinery, mergers/takeovers

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10
Q

Invest appraisal definition

A

A series of techniques designed to assist businesses in judging the desirability of investing in particular projects

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11
Q

When may investment appraisal be necessary?

A
  • introducing new product
  • expansion
  • new technology
  • advertising campaigns
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12
Q

Types of investment appraisal

A

Payback
Average rate of return
Net present value

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13
Q

What is payback?

A

The length of time that I takes for an investment to pay for itself from the net returns provided by that particular investment

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14
Q

Formula for payback

A

No of full years + what you need / what you get x 12

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15
Q

Advantages of payback

A
  • Easy to calculate
  • Takes into account the cost of investment
  • Focuses on short term cash flow
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16
Q

Disadvantages of payback

A
  • ignores the overall return on a project
  • ignores the time value of money
  • encourages a short term approach
17
Q

What is average rate of return (ARR)?

A

A method of investment appraisal which measures the net return per annum as a percentage of the initial spending

18
Q

How to work out average profit?

A

Total profit or returns/ no. of years

19
Q

ARR formula?

A

Average profit/ initial costs x 100

20
Q

Steps to calculate ARR

A

1) calculate profit over life time
2) divide by the number of years of the investment project to give the average annual profit
3) apply the ARR formula

21
Q

Higher or lower rate for ARR?

A

Higher

22
Q

Higher or lower rate for payback?

A

Lower

23
Q

Advantages of ARR

A
  • measures profitability
  • easy to compare % returns against other investments
  • considers total revenue
24
Q

Disadvantages of ARR

A
  • ignores the timings of cash flows
  • ignores the time value of money
  • ignores the risk factor of having a long payback period
25
Q

What is net present value?

A

The present value of future income from an investment appraisal, less the cost

26
Q

Calculating NPV

A

1) multiply net cash flow x discount factor
2) add up all the present values
3) subtract the initial outlay

27
Q

Advantages of NPV

A
  • considers all cash inflows
  • use of discounting reduces the impact of long term , less likely cash flows
  • has a decision making mechanism- rejects projects with negative NPV
28
Q

Disadvantages of NPV

A
  • complex to calculate
  • can not compare projects with different initial costs
  • rate of discount is critical- if it is high, fewer projects will be profitable
29
Q

What is a decision tree?

A

Mathematical models that set out all the options available for manager when making a decision, plus the possible outcomes of those decisions

30
Q

Expected value formula

A

Estimated financial effect x probability

31
Q

Net gain formula

A

Expected value of each outcome + deducting costs associated with decision

32
Q

Advantages of decision trees

A
  • highlight possibilities that had not previously been considered
  • require numerical values to be placed upon decisions- improves results
  • takes account risks involved and makes the decision maker aware of them
33
Q

Disadvantages of decision frees

A
  • probabilities are estimated
  • do not take into account non- numerical factors
  • time lags may make data out of date
  • process can be time consuming
  • diagrams can become unmanageable for complex decisions
34
Q

ARR- formula for total profit over life time

A

Total net cash flow - investment outlay

35
Q

What is critical path analysis?

A

Project management tool that uses network analysis to help project managers handle complex and time sensitive operations

36
Q

Advantages of CPA

A
  • helps reduce risk and costs of complex projects
  • encourages careful assessment of requirements of each activity in a project
  • help sport activities which have some slack and could therefore transfer some resources
37
Q

Disadvantages of CPA

A
  • baser on estimates and assumptions made
  • CPA does not guarantee the success of a project
  • resources may not actually be as flexible as management hope when they come to address the float
  • too many activities make the network diagram too complicated

Business Theme 3 (7 decks)

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