3.3

Question 1

Why does a business need or want to forecast sales?

Answer 1

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

Question 2

What is extrapolation?

Answer 2

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

Question 3

Basic assumption of expltrapation

Answer 3

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

Question 4

Moving averages

Answer 4

a+b+c
———-
3

b+c+d
————-
3

Etc

Question 5

What is volatile data?

Answer 5

See trends more easily

Question 6

Purpose of moving average

Answer 6

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

Question 7

Benefits of extrapolation

Answer 7

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

Question 8

Drawbacks of extrapolation

Answer 8

• 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)

Question 9

investment appraisal overview

Answer 9

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

Question 10

Invest appraisal definition

Answer 10

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

Question 11

When may investment appraisal be necessary?

Answer 11

• introducing new product
• expansion
• new technology
• advertising campaigns

Question 12

Types of investment appraisal

Answer 12

Payback
Average rate of return
Net present value

Question 13

What is payback?

Answer 13

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

Question 14

Formula for payback

Answer 14

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

Question 15

Advantages of payback

Answer 15

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

Question 16

Disadvantages of payback

Answer 16

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

Question 17

What is average rate of return (ARR)?

Answer 17

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

Question 18

How to work out average profit?

Answer 18

Total profit or returns/ no. of years

Question 19

ARR formula?

Answer 19

Average profit/ initial costs x 100

Question 20

Steps to calculate ARR

Answer 20

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

Question 21

Higher or lower rate for ARR?

Answer 21

Higher

Question 22

Higher or lower rate for payback?

Answer 22

Lower

Question 23

Advantages of ARR

Answer 23

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

Question 24

Disadvantages of ARR

Answer 24

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

Question 25

What is net present value?

Answer 25

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

Question 26

Calculating NPV

Answer 26

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

Question 27

Advantages of NPV

Answer 27

- 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

Question 28

Disadvantages of NPV

Answer 28

- 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

Question 29

What is a decision tree?

Answer 29

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

Question 30

Expected value formula

Answer 30

Estimated financial effect x probability

Question 31

Net gain formula

Answer 31

Expected value of each outcome + deducting costs associated with decision

Question 32

Advantages of decision trees

Answer 32

- 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

Question 33

Disadvantages of decision frees

Answer 33

- 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

Question 34

ARR- formula for total profit over life time

Answer 34

Total net cash flow - investment outlay

Question 35

What is critical path analysis?

Answer 35

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

Question 36

Advantages of CPA

Answer 36

- 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

Question 37

Disadvantages of CPA

Answer 37

- 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